Quick answer

The IRS generally treats staking rewards and many forms of DeFi yield as ordinary income at the fair market value (FMV) on the date and time you receive them. After you recognize income, the token you received carries a cost basis equal to that FMV; a later sale or exchange becomes a taxable capital gain or loss measured from that basis.

(See IRS Notice 2020-24 and the IRS virtual currency guidance for more detail: https://www.irs.gov/pub/irs-drop/n-20-24.pdf and https://www.irs.gov/individuals/virtual-currencies.)

Why this matters now

Tax rules for crypto remain one of the most common audit triggers and compliance gaps I see in practice. In my work advising more than 500 clients on digital-asset issues, the mistakes I encounter are usually recordkeeping-related: missing timestamps for reward receipts, blending pooled and personal stakes, and failing to track FMV when rewards compound (automatic restaking). Getting the income recognition and cost-basis right prevents surprise tax bills and reduces audit risk.

How the rules apply (practical summary)

  • Staking rewards: IRS Notice 2020-24 treats staking rewards as ordinary income when the taxpayer has dominion and control over the reward. Record the FMV in USD at receipt and report it as other income on your Form 1040 for the tax year received. The received tokens become property with that FMV as cost basis for future capital gains calculations.

  • DeFi yield: “DeFi” is a broad category. Interest-like returns from lending protocols are generally treated as ordinary income (taxable as interest or other income). Liquidity provider (LP) rewards, protocol-native token distributions, and automated market maker (AMM) fees can be treated as ordinary income when received, but character may vary depending on facts (e.g., whether you’re running a trade business or providing services).

  • Swaps, trades and liquidity withdrawals: When you trade or swap crypto or remove assets from an LP position, you typically trigger a taxable disposition. Compute gain or loss using the previously established cost basis and holding period.

  • Auto-compounding / restaking: Even if rewards are automatically added to your stake, each receipt is a taxable income event at FMV on the timestamp the reward is credited to you.

Examples (simple, real numbers)

1) Staking rewards

  • You stake 10 XTZ and receive 0.5 XTZ staking reward on June 1. If 0.5 XTZ is worth $100 at the time you receive it, you report $100 of ordinary income. If later you sell that 0.5 XTZ (or the original staked tokens) for $150, your capital gain is $50 measured from the $100 cost basis.

2) DeFi lending

  • You lend 100 USDC and earn 3 USDC in interest during the year. That 3 USDC is ordinary interest income and taxed in the year received.

3) Liquidity provider (LP) reward

  • You add ETH/DAI to an AMM and receive protocol-native token RWD as incentive. Each time you receive RWD, recognize FMV as ordinary income. If you later sell RWD, compute gain/loss versus the FMV recorded at receipt.

Key recordkeeping and reporting checklist

  • Capture timestamps for each reward receipt (unambiguous UTC preferred).
  • Record token amount, token symbol, and USD FMV at receipt (use exchange price at the timestamp or an accepted price source).
  • Track the origin of the reward (blockchain address, validator ID, or protocol contract) to distinguish personal rewards from pooled or custodial events.
  • Keep transaction exports from wallets and exchanges (CSV/JSON) and proof of transfers between your own wallets.
  • Use crypto tax software to import and normalize transactions; reconcile with exchange statements.

Good records make it easier to populate Form 1040 (report ordinary income) and Schedule D/Form 8949 for capital gains when you dispose of tokens.

Common complications and how to handle them

  • Pooled staking or validator splits: If rewards are pooled and the custodian or third-party splits them among participants, you are taxable on the share you control when credited. Obtain participant-level statements from the pool operator.

  • Custodial platforms and 1099s: Many exchanges or custodial services now issue 1099 series forms (1099-NEC, 1099-MISC, 1099-K, or broker 1099-B depending on services). A 1099 does not change the underlying tax treatment but can prompt IRS matching. Reconcile 1099s with your blockchain records.

  • Token airdrops vs. rewards: Airdrops received without action can be taxable when you have dominion and control. The line between an airdrop and a reward may be fact-intensive.

  • Forks and reorganizations: Forked coins that are freely received can be income on receipt if you have control and can sell/exchange them.

  • Cross-border, FATCA and foreign accounts: If you use foreign platforms, you may have additional reporting obligations (FBAR, FATCA Form 8938). Consult a tax professional for cross-border implications.

Reporting mechanics and forms (practical notes)

  • Ordinary income: Report staking and DeFi income as other income or interest on Form 1040 in the tax year you receive it. The IRS asks about virtual currency transactions directly on Form 1040—answer the question accurately.

  • Capital gains/losses: Dispositions of tokens received as rewards are reported on Schedule D/Form 8949 using the FMV-at-receipt as cost basis. Track holding periods (short-term = one year or less; long-term = more than one year) to determine rate.

  • Employer/payroll crypto compensation: If you receive crypto as wages, it’s subject to payroll taxes and reported on W-2. Separate the wage issue from staking/deFi reward treatment.

Note: tax forms and line placements can change; reference instructions on IRS.gov and confirm with a tax preparer each filing season.

Tax planning ideas (professional, not tax advice)

  • Tax-loss harvesting: Use realized losses to offset capital gains from later sales of rewarded tokens. Losses can also offset ordinary income up to limits, and excess may be carried forward.

  • Timing dispositions: If possible, hold rewarded tokens more than one year to qualify for long-term capital gains rates on later sales.

  • Entity choices: High-volume or business-like staking/pooling may fit better within an entity (LLC, corporation) for operational and tax considerations. Evaluate trade-offs with a CPA.

  • Software and automation: Use reputable crypto tax software to capture receipts, FMV, and gas fees that adjust cost basis. In my practice, clients who use automated imports cut preparation time and errors by >50%.

Frequently asked questions

Q: If I never sell staking rewards, do I still owe tax?
A: Yes. The IRS treats staking rewards as income when received even if you hold them. The tax is based on FMV at receipt.

Q: If rewards are automatically restaked, when is income recognized?
A: Each reward credited to your account (even if restaked) is an income event. Keep timestamped records from the protocol.

Q: What if an exchange stops reporting historical prices?
A: Archive CSVs or JSON exports and capture reliable price data at receipt timestamps from providers like CoinGecko, CoinMarketCap, or exchange order books. Reconciliation is critical for audits.

Links and further reading

FinHelp further reading:

Final notes and professional disclaimer

This article explains common tax treatments for staking rewards and DeFi yield based on IRS guidance (including Notice 2020-24) and common industry practice as of 2025. It is educational and not individualized tax advice. Tax facts can change and your situation may involve additional complexity (state taxes, foreign reporting, or business classifications). Consult a licensed CPA or tax attorney for personalized guidance and to confirm filing details for your specific tax year.