If you’ve earned interest from cryptocurrency this year, you have income tax to pay.
Crypto exchanges and protocols often offer users interest rewards. While these rewards can be a great source of passive income, they also come with an associated tax liability.
In this guide, we’ll cover everything you need to know about how crypto interest is taxed. By the time you’re finished reading, you’ll understand how you can report your interest rewards on your tax return.
What is crypto interest?
When you put in your money in a bank, you typically get rewarded with interest.
Certain crypto exchanges and DeFi protocols offer similar rewards for holding crypto — often with much higher interest rates!
Many centralized exchanges offer interest rewards to customers who hold cryptocurrency on their platform. These rewards are often used as an incentive to attract users.
Alternatively, you may earn interest rewards by staking your cryptocurrency through a decentralized protocol.
Do you pay tax on cryptocurrency interest?
In general, cryptocurrency is subject to ordinary income tax and capital gains tax.
When you earn cryptocurrency interest, you’ll recognize income based on the fair market value of your coins at the time of receipt. If you dispose of your rewards in the future, you may pay capital gains tax depending on how the price of your interest rewards haves changed since you originally received them.
For more information on how crypto is taxed, check out our ultimate guide to cryptocurrency taxes.
Do you have to report crypto interest under $600?
You’re required to report all of your cryptocurrency income, regardless of whether your exchange sends you a 1099 form.
If you make less than $600 of income from an exchange, you should report it on your tax return. While it’s unlikely that this will make a material impact on your tax bill, doing this will help you stay compliant with tax law and show that you are making a good faith effort to report all of your income.
Is crypto interest taxed twice?
While cryptocurrency interest can be subject to both income tax and capital gains tax, it’s not accurate to say that it’s taxed twice.
When you dispose of your cryptocurrency interest rewards, you’ll only incur capital gains/losses depending on how the price of your crypto has changed since you originally received it.
Does crypto interest get reported to the IRS?
Exchanges issue Form 1099-MISC when a customer has earned more than $600 of cryptocurrency income — including interest rewards. An identical copy is filed with the IRS.
At this time, decentralized protocols do not report to the IRS. However, it’s important to remember that transactions on blockchains like Ethereum are publicly visible and permanent. In the past, the IRS has worked with contractors like Chainalysis to analyze the blockchain and cut down on tax fraud.
Do you have to report crypto interest under $600?
Remember, you’re required to report all of your cryptocurrency income, regardless of whether your exchange sends you a 1099 form.
If you make less than $600 of income from an exchange, you should report it on your tax return. While it’s unlikely that this will make a material impact on your tax bill, doing this will help you stay compliant with tax law and show that you are making a good faith effort to report all of your income.
How can I track the fair market value of my crypto?
To accurately report your interest rewards on your taxes, you’ll need to keep records of the fair market value of your crypto at the time of receipt.
The fair market value of your interest rewards in USD will determine your income tax liability. In addition, it will also determine the cost basis of your cryptocurrency, which can help you calculate capital gains and losses in the case of a future disposal.
If you’re having trouble finding the fair market value of your interest rewards at the time of receipt, you can use crypto tax software like CoinLedger. The platform’s price engine can automatically find the historical values of your cryptocurrency.
How do I report cryptocurrency interest on my taxes?
Generally, crypto-related interest and staking rewards should be reported as ‘Other Income’ on Schedule 1.
If you sold or disposed of any of the cryptocurrency interest rewards you received, you can report your capital gain or loss on Form 8949.
How CoinLedger can help
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