Earn Interest on Crypto: The Taxes Guide

29 Mar, 2023 · 4 min read

Are you looking to earn interest on crypto?

Many exchanges and popular crypto services offer interest programs when putting your crypto to work. There’s a wide range of options and interest rates available from BlockFi to Celsius.network. Moreover, the range of crypto assets available also increases beyond Bitcoin and stablecoins to earn interest.

Today, we cover all the tax implications of earning interest on crypto with real-life scenarios by a crypto expert CPA.

Where to earn interest on crypto?

Many crypto exchanges and services now offer interest-earning products using your crypto or event FIAT (e.g., USD, EUR). Locking your crypto in one of these platforms can be a great way to generate passive income while avoiding losses that come with inexperience related to day trading. If you’re planning to hold in the long-term, allocating some of your portfolios to a crypto interest-earning product may be a great solution.

Currently, one of the most famous interest vehicles is the BlockFi interest product, offering from 4.5% to 8.6% rates, depending on the crypto you choose to lock funds. Stablecoins (e.g., USDC or GUSD) offer higher rates than more volatile crypto assets.

Another popular product comes from Crypto.com, offering many digital assets with interest rates ranging from 7.5% to 14%. As usual, stablecoins offer the highest interest rates from all options (e.g., Dai, Tether, TUSD, Paxos).

Major exchanges as Gemini and Binance also offer interest options. Gemini Earn offers 2.05% on Bitcoin lockings and up to 7.40% on Gemini Dollar and DAI. Other digital assets interest rates from 4.48% (Filecoin) to a lowest of 1.26% (The Graph).

Binance offers flexible savings and locked savings with more than 70 assets available in the first category. Stablecoins (e.g., USDT, BUSD, and USDC) offer 5.31% when locking savings, while these rates go down with other cryptocurrencies. In the flexible savings setting, interest rates (7-days APYs) can vary from as low as 0.13% to 4.5% since you can withdraw funds at any time.

Other popular alternatives include Nexo or Nuri. Nexo offers interest rates from 8% to 12%, with a wide range of digital assets available. Moreover, Nuri (formerly Bitwala) offers 5% interest/year on Bitcoin, with weekly payouts.

We also put together a guide with options and tax implications if you’re looking for crypto-backed loans.

Is earning interest on crypto taxable?

In short, yes! Let’s see how the taxes play out after seeing the numerous platforms where you earn interest on crypto.

When you receive your crypto interest, you need to recognize interest income based on the Fair Market Value (valued in FIAT such as USD or EUR) of the crypto you received. The same income recognition applies if you receive interest in any stablecoin even though the price is relatively the same as if you were receiving in FIAT. It doesn’t matter whether or not you convert the crypto interest into fiat.

As a result, all crypto or fiat interest received from putting your crypto to work will increase your income for the year, which can lead to a higher income tax bracket, depending on the amount you’re receiving. Please check this comprehensive guide for clarifications on all the crypto taxable events in the US.

How to determine FMV when I receive the crypto?

Sometimes holders have doubts on at which time they need to recognize the interest they receive. It can be difficult to track earnings if you’re not using any crypto tax software that automatically registers the right FMV when you receive them.

Remember, each time you receive interest in your account, and have full control/access to that wallet, you need to report that income based on its FMV.

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How to calculate income if the crypto I earned changes in its underlying price?

Let’s imagine that you receive your interest in BTC or ETH. Naturally, the price of any of these cryptocurrencies changes significantly on a minute basis. However, when you receive interest income in any crypto, you are required to recognize it based on its FMV (e.g., in USD) at the time you receive it. Any price changes afterward will not impact the amount of income you recognized, as long as you hold the crypto.

What if I later sell the crypto interest I earned?

The income you recognize upon receipt of your crypto interest becomes your basis cost in the crypto, and it can offset your sales proceeds for calculating gain/loss if you sell the crypto later.

If you later sell the crypto you earned, you’ll be liable for capital gains tax, and you will need to report that trade. You still need to report all trades even if you sell that crypto at a loss.

If you hold that crypto for more than one year before selling, you’ll be able to get a more favorable long-term capital gain tax rate that can go from 0% to 20%, depending on your taxable income level. If you sell before one year of selling, you are subject to a short-term capital gain tax rate that can range from 10% to 37%, depending on your tax situation. Learn more on how crypto tax laws favor long-term holders.

How to report crypto interest on your taxes?

In the US, according to the IRS, you need to answer “Yes” to the crypto-related question on Form 1040 if you acquired or traded cryptocurrency during the year. If you earned interest income in crypto, you would need to answer “Yes” to that question.

Moreover, you need to report any interest you earned (in crypto or FIAT) and add it to your total taxable income. Regarding the nature of crypto interest, you need to report it on your income tax return as interest or ordinary income.

For more details on how to report all your crypto trades during the year, check our comprehensive guide.

Taxes on crypto interest: Simulation

Let’s simulate a situation you might face in real life where you receive interest in crypto and later sell it at a profit.

1. John invests 1 BTC in an interest account earning 5%/year.

John purchased 1 BTC when 1 Bitcoin trades at $35K (June 2021) and put it in an interest account, earning 5% a year (paid in Bitcoin).

2. John receives it Bitcoin interest.

In July 2021, John will receive 0.002083 BTC as interest in his interest account. At that time, the Bitcoin price is $50K, up from $35K. As a result, John needs to recognize an interest income at $104.15 (0.002083x$50,000), which will become his cost basis in the 0.002083 BTC he received.

3. John sells his BTC amid a record high price.

In December 2021, Bitcoin reaches a record high price, and John wants to sell the bitcoin he earned before in the year. Bitcoin’s price is now $70K. Let’s say John sells the 0.002083 BTC he received in July 2021 for $145.81. He will need to recognize a short term capital gain of $41.66 (=($70,000 –  $50,000) x 0.002083).

4. John pays income tax for his crypto interest and capital gains tax for his trade.

In the above example, John needs to report two types of income. First, he needs to report $104.15 as interest income, subject to an ordinary income tax rate which depends on his overall income tax bracket.

Secondly, John will need to pay capital gains tax on the $41.66 capital gain from his BTC sale. Since he held the BTCfor less than 12 months before selling it, he’ll be subject to a short-term capital gains tax rate, ranging from 10% to 37%, depending on his total taxable income and other factors (e.g., filing status).

If he held his earned crypto for longer than 12 months, he would benefit from a more favorable long-term capital gains tax rate, ranging from 0 to 20%. Remember, planning your trades by considering your holding periods can benefit you from a tax perspective.

Earn crypto interest the smart way

Earning crypto interest is a great way to generate passive income while holding your crypto in the long term. Receiving interest in crypto increases the need to correctly calculate FMV increases and also plan the amount of crypto you’ll have to sell to pay for taxes in the following year.

We encourage you to check our leading crypto tax software to make your tax season a breeze.

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Moritz Nold: Crypto Tax Manager
Crypto Tax Manager
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.


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