Yes, interest earned on crypto is taxable income.
Crypto Interest Taxation
This is true regardless of where it is held. The most common scenarios we run into:
- Through short-term P2P (peer-to-peer) lending on a platform like KuCoin
- Given as deposit rewards on centralized exchanges such as Nexo, Celsius, or Voyager
- In vaults, pools, or farms offered on decentralized exchanges such as PancakeSwap or ApeSwap
Strictly speaking, liquidity pools are not always paying “interest”, but in practice that is how the rewards are being treated for tax purposes. The rewards from those pools are taxable income. This is true if you are earning in-kind rewards (i.e. CAKE for CAKE) but is also true even if you are receiving a different kind of token (i.e. BBQ for BANANAS).
And for anyone not in the crypto space: yes, we fully recognize how absurd that last sentence sounds.
When Is the Interest Taxable?
In all of these scenarios, the interest received is taxable income upon receipt.
The “upon receipt” can cause some confusion in a few unique scenarios.
What about if you use a vault with a lockup period? Apps like Altrucoin allow users to deposit partner altcoins to earn interest – with pretty generous rewards offered in exchange for longer lockup periods.
Let’s say you deposited a token into a Altrucoin vault September 15th and elected a 180-day lockup period. From Sept-Dec Year 1 it earns $75 and then from January-March Year 2 it earns another $50.
But you won’t be able to access any of those earnings until March of Year 2. Do you just defer the income until Year 2 and count all $125 at once?
It will likely depend on when you gain “dominion and control” over those earnings. For instance, with multi-year CDs the interest that has been accrued during that year is taxable – even if it has not been paid. If you are able to access a portion of the interest accrued, you may be required to claim it as income. Otherwise, it would more than likely be claimed in the year the lockup period ends and you are able to claim it.
As always, we recommend using a crypto tracking software to help assist you with this. Manually keeping track of all of these moving parts is of course possible, but can be quite difficult without some assistance.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
