Earning yield on digital assets sounds simple: you park tokens and watch the balance grow. Unfortunately, tax rules complicate matters somewhat. The IRS sees each interest drop as new income, no matter how small, and expects you to declare it. Miss even a few dollars and you could trigger notices later.

What is crypto interest?

Crypto interest is the reward you earn for letting someone else use your coins (through lending, staking, or liquidity programs). Think of it like the tiny yield on a savings account, only paid in tokens instead of dollars.

Use our free crypto tax calculator.

Crypto interest tax rates

Interest is taxed at your regular income rate (the same bracket that applies to wages or bank interest). Capital‑gains taxes only kick in when you later dispose of the interest tokens.

See the current tax rates for cryptocurrency.

Ways of earning interest on crypto

• Lending – for example, depositing USDC with a lending desk that pays an annual yield.

• Staking see our post on staking crypto.

• DeFi liquidity pools – read our DeFi tax guide.

• Centralized interest accounts – some exchanges offer savings‑style programs.

Is crypto interest taxable?

Yes. Each time a platform credits you, you recognize ordinary income equal to the fair‑market value of the tokens at that moment (even if you keep them on the same platform).

Calculate your crypto gains with our free crypto profit calculator.

How crypto interest is taxed?

1. Recognition – the day you receive tokens.

2. Valuation – use the spot price in US dollars at that timestamp.

3. Reporting – aggregate all payouts and list them as income.

4. Later disposal – any sale or swap of those tokens is a separate capital‑gains event.

How to report crypto interest income?

1. Collect data: export wallet or exchange statements that show each payout.

2. Convert to USD: note the price for every deposit date.

3. Sum totals: add the values to get your yearly interest income.

4. Enter on return: most filers use Schedule 1 (line 8 “other income”). If you receive a 1099‑MISC or 1099‑INT, match your records to that form.

5. Keep proof: store CSVs or screenshots in case the IRS asks.

How can you reduce taxes on crypto interest?

• Earn interest inside a self‑directed IRA (income grows tax‑deferred or tax‑free).

• Harvest capital losses on under‑performing coins to offset other income.

• Time sales of interest tokens for years when your total income is lower.

Learn how to reduce your crypto taxes.

Mistakes to avoid when reporting crypto interest

• Ignoring micro‑payouts that add up over the year.

• Mixing interest income with capital gains on the same worksheet.

• Using monthly average prices instead of the actual price at receipt.

• Forgetting to reconcile 1099 forms with your own ledger.

See our expert picks of the best crypto wallets.

Penalties for not reporting crypto interest

Failing to report can result in penalties and late-payment interest. Repeated neglect may invite harsher fines.

Learn more about what happens if you don’t file your crypto taxes.