If you’ve used Decentralized Finance (DeFi) platforms in the past year, you’ve probably earned rewards, swapped tokens, or added crypto to liquidity pools. But when tax season arrives, figuring out how to report these activities on your tax return can leave you with more questions than answers.
The IRS hasn’t published direct rules for every DeFi transaction, but that doesn’t mean your obligations are unclear. Many activities in DeFi—staking, farming, lending—are treated just like other crypto transactions for tax purposes. Whether it’s income or a disposal, taxes may still apply.
This guide helps you understand how DeFi activities are taxed in the United States. By the end, you’ll know how to identify taxable events and stay compliant with current IRS expectations. So let’s get started.
How the IRS Views DeFi Transactions?
As per the crypto tax laws in the USA, if you’re involved in DeFi, you are liable to pay taxes. However, the IRS hasn’t yet issued specific rules for every DeFi transaction. But that doesn’t mean you can ignore your tax obligations.
If your crypto is treated as income, you’ll need to pay Income Tax on it. On the other hand, if it’s viewed as a capital asset, you’ll be liable for Capital Gains Tax. Let’s take a closer look at the current tax rules for both cases:
Capital Gains Tax on DeFi Transactions
Capital Gains Tax applies when you dispose of a crypto asset. In DeFi, this can happen in several common situations:
- Swapping one cryptocurrency for another on a decentralized exchange (DEX)
- Using crypto to buy another asset, including stablecoins or wrapped tokens
- Selling crypto for fiat (like USD)
- Adding or removing liquidity from a protocol if LP tokens are issued
- Unwrapping or wrapping tokens when the exchange is treated as a trade
In each of these scenarios, you’re either giving up ownership of one asset or receiving a different one in return. That change is considered a disposal, and the IRS expects you to calculate any gain or loss based on the asset’s cost basis and fair market value at the time of the transaction.
Read More: Crypto Tax USA Guide
Income Tax on DeFi Transactions
Income Tax applies when you earn new crypto through DeFi protocols. These earnings are considered ordinary income and must be reported at their fair market value in USD on the day you receive them.
Here are some common DeFi activities likely to trigger Income Tax:
- Receiving staking rewards from DeFi platforms
- Earning liquidity mining rewards in the form of new tokens
- Getting interest from lending crypto through a protocol
- Play-to-earn tokens and rewards earned by participating in DeFi-based games
- Yield farming rewards when the protocol issues new tokens as incentives
The IRS considers these forms of crypto as compensation. You’re receiving value, even if you don’t sell the tokens immediately. You’ll need to record the fair market value on the date of receipt, and that amount becomes part of your total taxable income for the year.
Read More: Best Crypto Portfolio Tracker In The USA
DeFi Transaction Tax Treatment: An Overview
The tax treatment of DeFi transactions in the US depends on whether the activity results in a disposal or new income. The table below outlines how various DeFi actions are likely taxed based on current IRS guidance and interpretations.
DeFi Transaction | Is It Taxable? | Likely Tax Treatment | Trigger Event |
Swapping crypto on DEXes | Yes | Capital Gains Tax | Disposal of one token for another |
Buying crypto with USD on DEX | No | Not Taxable | No disposal |
Buying crypto with another crypto | Yes | Capital Gains Tax | Crypto-to-crypto trade |
Lending crypto (token exchange) | Yes | Capital Gains Tax | Disposal of an original asset for a new token |
Lending crypto (no token issued) | No | Not Taxable at deposit | No disposal |
Earning interest via lending (new tokens) | Yes | Income Tax | Earning new tokens |
Earning interest (token value increases only) | Yes (later) | Capital Gains Tax | Gain is realized when the token is sold or swapped |
Borrowing crypto (with a token issued) | Yes | Capital Gains Tax | Treated as crypto-to-crypto trade |
Borrowing crypto (no token issued) | No | Not Taxable | No disposal |
Paying interest in crypto | Yes | Capital Gains Tax | Spending crypto on services |
Paying interest in Fiat | No | Not Taxable | Fiat spending |
Receiving staking rewards | Yes | Income Tax | Fair market value of tokens at time of receipt |
Yield farming (earning new tokens) | Yes | Income Tax | Receiving rewards |
Yield farming (token value increases only) | Yes (later) | Capital Gains Tax | Gain realized on disposal |
Adding liquidity (token received) | Yes | Capital Gains Tax | Crypto-for-token exchange |
Removing liquidity (token returned) | Yes | Capital Gains Tax | Token-for-crypto exchange |
Receiving LP rewards (new tokens) | Yes | Income Tax | Earning new rewards |
Receiving LP rewards (value increases) | Yes (later) | Capital Gains Tax | Gain realized when the token is sold |
Margin trading / Derivatives | Yes | Capital Gains Tax | Realized at the position close or liquidation |
Token wrapping/unwrapping | Yes | Capital Gains Tax | Token swap, even if the value is the same |
Transfer fees paid in crypto | Yes | Capital Gains Tax | Spending crypto for a service |
Rebase tokens (adjusted supply only) | No (likely) | Not Taxable | Similar to a stock split |
Play-to-earn (earning tokens) | Yes | Income Tax | Tokens earned during gameplay |
Play-to-earn (selling/trading rewards) | Yes | Capital Gains Tax | Disposing of earned assets |
DeFi Transaction Tax Treatment: Detailed Analysis
Now that you have a general idea of how DeFi Transactions are taxed in the US, let’s get into its details:
Swapping Crypto on DEXs
When you swap one cryptocurrency for another on a decentralized exchange (DEX), the IRS considers it a taxable event. Even if no fiat currency is involved, the act of trading crypto assets is treated as a disposal of property. The difference between the original cost basis and the fair market value of the asset at the time of the swap is subject to Capital Gains Tax.
This applies even if you’re exchanging tokens of equal value or swapping stablecoins. It’s essential to keep records of all swap transactions, including acquisition and disposal dates, fair market values, and any associated fees.
Adding and Removing Liquidity from Pools
When you add crypto assets to a liquidity pool, you’re often issued a token that represents your share in the pool. The IRS may treat this as a crypto-to-crypto trade, triggering a disposal event. If the value of the token you receive differs from the value of the crypto you contributed, any difference is subject to Capital Gains Tax.
Similarly, removing liquidity can also be considered a disposal. When you redeem your pool token to retrieve your crypto, you’re effectively exchanging one asset for another. If there’s a gain between your original cost basis and the value of the returned assets, you’ll owe tax.
Receiving Liquidity Pool Rewards
When you receive new tokens as a reward for providing liquidity, the IRS considers this income at the time you gain control over the tokens. The fair market value of the tokens in USD on the day you receive them must be reported as ordinary income. This applies regardless of whether you immediately sell the tokens or hold them.
The income must be included in your tax return for that year and will be taxed according to your regular income tax rate. If you later sell or exchange these tokens, any gain or loss will be subject to Capital Gains Tax, with the cost basis being the value declared as income.
Read More: What Is Short-Term Liquidity?
DeFi Staking Rewards
Staking rewards are considered taxable income by the IRS once you gain control over the assets. This applies to both direct staking and DeFi-based staking through protocols. The fair market value of the crypto rewards on the day they become accessible to you must be reported as ordinary income.
The IRS clarified in 2023 that staking rewards are taxable “when received,” meaning when you can sell, transfer, or use them. After including the value as income, any later sale, trade, or use of the staking rewards may trigger Capital Gains Tax. Your cost basis is the value declared as income at the time of receipt.
Additional Read: Best Crypto Staking Platforms
Yield Farming Rewards
Yield farming involves locking your crypto into DeFi protocols to earn rewards, often in the form of new tokens. If you receive new tokens as a reward, the IRS is likely to treat these as income. The fair market value of the tokens on the day you receive them becomes taxable and should be reported under Income Tax.
On the other hand, some yield farming strategies do not generate new tokens but increase the value of your holdings. In such cases, no tax is due at the time of earning. However, when you dispose of the tokens—through selling, trading, or using them—you will be liable for Capital Gains Tax on any profit from the transaction.
Borrowing Crypto in DeFi
Borrowing crypto through DeFi does not always trigger a taxable event. If you provide collateral and receive nothing in return but a loan, this is not considered a disposal, and there is no tax liability at that point. You’re simply using your existing assets to secure borrowed funds.
However, some DeFi platforms issue a token that represents your collateral or loaned amount. If you receive such a token in exchange for your deposit, the IRS may view this as a crypto-to-crypto trade. That means you’ve disposed of one asset to acquire another, and any gains involved would be subject to Capital Gains Tax.
Paying Interest in DeFi
Paying interest in a DeFi protocol becomes a taxable event when the interest is paid using cryptocurrency. The IRS views this as spending crypto on a service. You must calculate the capital gain or loss by comparing the fair market value of the crypto at the time of payment with its original cost basis.
If you’re paying interest using fiat currency, there’s no taxable event. But when the interest payment is made in crypto, especially from borrowed funds, this may also qualify as a disposal under IRS rules. In certain situations, if the interest relates to investment activities, it may be eligible for deduction, though this depends on your personal tax filing details.
Earning Interest Through DeFi Protocols
Earning interest through DeFi protocols can trigger different tax treatments depending on how the protocol distributes returns. If you receive additional tokens or coins as interest, the IRS considers this income. The fair market value of the received tokens at the time you gain control over them must be reported under Income Tax.
However, if your interest is not paid in new tokens but instead reflected as an increase in the value of your original deposit, the IRS may not consider this income at the time of accrual. Instead, the gain will be taxed as Capital Gains when you dispose of your position.
Wrapped Tokens
Wrapping tokens allows you to use a cryptocurrency on a different blockchain. For example, wrapping Bitcoin into WBTC lets you interact with Ethereum-based DeFi protocols. Although this process doesn’t change the value of your asset, it technically involves exchanging one crypto for another.
The IRS considers wrapping a taxable event because you’re swapping one digital asset for another. Even if there’s no real gain or loss due to price parity, you may still need to report it as a crypto-to-crypto trade. If the fair market value at the time of wrapping is higher than your original purchase price, the gain may be taxed under Capital Gains Tax rules.
Transaction and Transfer Fees
Transaction fees paid in crypto when buying, selling, or swapping digital assets are generally considered part of your cost basis. This means you can add those fees to the acquisition cost, which may help reduce your overall capital gains when you eventually dispose of the asset.
Transfer fees, such as those paid when moving crypto between wallets, are treated differently. If you pay the transfer fee in cryptocurrency, the IRS may view this as a disposal of that asset. In such cases, spending crypto, even for a fee, can be subject to Capital Gains Tax. To avoid surprises, it’s important to track these fees and record the fair market value at the time of payment.
Play-to-Earn (P2E) Gaming Rewards
Play-to-Earn (P2E) platforms allow you to earn cryptocurrency by participating in blockchain-based games. These earnings typically come in the form of new tokens or assets as a reward for in-game activities like battles, quests, or marketplace trades.
The IRS treats newly received tokens as income. You must report the fair market value of the tokens in USD on the date you receive them. If you later sell, trade, or use those tokens, you may incur Capital Gains Tax on any price difference between the value at receipt and the value at disposal.
Tax on Token Rebases
Token rebases are mechanisms that adjust the number of tokens in your wallet to maintain a stable value. Instead of changing the price of the token, rebasing protocols increase or decrease the token supply to keep its value aligned with a target, such as $1.
The IRS has not provided explicit guidance on token rebases. However, given how similar rebases are to stock splits, they may not be viewed as taxable events. Still, to stay conservative, you should keep detailed records of any changes to your token balances and monitor whether they result in a gain or loss if you later sell or dispose of the assets.
How KoinX Helps You Track DeFi Taxes?
Tracking DeFi transactions manually can quickly become complex, especially when dealing with multiple wallets, protocols, and chains. KoinX helps streamline this process by automating DeFi tax tracking and ensuring accurate reporting in compliance with IRS rules.
Seamless Integration with DeFi Platforms
KoinX connects directly to leading DeFi platforms, decentralized exchanges, and popular blockchains through API integrations or CSV uploads. Whether you’re using Ethereum, Polygon, Avalanche, or others, KoinX fetches your full transaction history and updates it in real-time. This saves you hours of manual effort and reduces the chance of errors.
Automatic Transaction Classification
Once your transactions are imported, KoinX identifies the type of each DeFi activity—be it staking, lending, yield farming, or borrowing. It assigns the correct tax treatment based on IRS guidance and tags them accordingly (e.g., income, capital gains, received from pool, interest payment). You can also manually adjust or reclassify transactions if needed.
Real-Time Tax Calculations
KoinX applies your selected accounting method (FIFO, LIFO, HIFO, or Spec ID) to calculate your gains, losses, and income. You can review these calculations at any time in your tax summary dashboard. This gives you clear visibility into your potential tax obligations across all your DeFi activity.
Comprehensive Tax Reports
At tax time, KoinX compiles your data into IRS-ready tax summaries and reports. These can be shared with your accountant or used for filing through your preferred tax app. This includes detailed breakdowns for each taxable event across every platform and wallet you use.
Get started with KoinX and simplify DeFi tax tracking with complete accuracy and confidence.
Conclusion
DeFi transactions are subject to IRS rules just like any other crypto activity. Whether you’re lending, staking, farming, or swapping, each action could have tax implications that you need to report correctly.
Staying compliant starts with accurate tracking and reporting. KoinX helps simplify this process by organizing your DeFi transactions, calculating taxes, and preparing reports—all in one place. Sign up for KoinX today and take control of your DeFi tax reporting with confidence.
Frequently Asked Questions
Do I Have To Report DeFi Losses To The IRS?
Yes. If you’ve incurred losses from DeFi activities such as trading or liquidity withdrawals, you must report them. These losses can be used to offset your capital gains and reduce your overall tax liability. Unused losses may also be carried forward to future tax years as per IRS guidelines.
Are Gas Fees Deductible When Calculating DeFi Taxes?
Yes, gas fees related to acquiring or disposing of crypto assets can be added to your cost basis or subtracted from your proceeds. This helps reduce your taxable gains. However, fees for transferring crypto between wallets are not always deductible and may require careful evaluation.
What Happens If I Don’t Report My DeFi Earnings?
Failure to report DeFi earnings may result in IRS penalties, audits, or interest on unpaid taxes. The IRS treats most DeFi earnings as income or capital gains, and non-compliance can lead to legal consequences. It’s essential to stay transparent and report all taxable events properly.
Can I Amend My Tax Return If I Missed DeFi Transactions?
Yes. If you realize that you missed reporting DeFi transactions after filing, you can file an amended tax return using Form 1040-X. This allows you to correct your records and stay compliant. It’s recommended to take this step promptly to avoid potential penalties.
