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 still has no direct, detailed rules for every type of DeFi transaction, which makes tax reporting more complex for users. In 2025, the IRS increased its focus on DeFi activity through expanded reporting requirements and stricter enforcement, adding even more pressure on taxpayers to get things right.
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.
Overview
- IRS treats most DeFi actions as taxable events requiring detailed reporting.
- Swaps, liquidity pool moves, and wrapping tokens trigger capital gains.
- Staking, yield farming, and LP rewards are taxed as income when received.
- IRS increasingly views DeFi protocols as intermediaries for reporting obligations.
- Accurate tracking of DeFi transactions is essential to avoid penalties and audits.
How the IRS Views DeFi Transactions?
DeFi platforms such as Uniswap, Aave, and Compound allow users to swap tokens, supply liquidity, or earn yield without relying on a central authority. While these features make DeFi flexible, they also create tax obligations that many users overlook.
The IRS hasn’t issued transaction-specific rules for every DeFi action, but it has made one point clear: most activities on these platforms still trigger taxes. Recent IRS updates from 2023 and 2024 also indicate that many DeFi protocols are now treated as intermediaries for reporting purposes, increasing the likelihood of taxable events showing up in future information returns.
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.
Example:
If you bought ETH for $1,500 and later swapped it on Uniswap when it was worth $2,000, your taxable capital gain is $500.
Short-Term vs Long-Term Gains
The IRS taxes gains differently depending on how long you held the asset.
- If you hold the crypto for less than 1 year, you incur short-term capital gains, which are taxed at your regular income tax rate.
- If you hold it for more than 1 year, you incur long-term capital gains. These are taxed at a rate of 0%, 15% or 20%.
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.
Common DeFi Activities That Trigger Income Tax
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
Example:
- If you earn $200 worth of staking rewards during a week, that $200 becomes taxable income at the time of receipt.
- If a liquidity mining program distributes tokens worth $45 to your wallet, that $45 is also taxable immediately.
- Even small rewards count, for example, a $12 airdrop must be reported.
Self-Employment Tax Consideration
If you earn DeFi income frequently or operate in a way that resembles a business activity, the IRS may treat your rewards as self-employment income. In such cases, you may owe additional self-employment tax alongside regular income tax.
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
Swapping one cryptocurrency for another on a DEX counts as a taxable disposal. The IRS taxes the gain based on the difference between your cost basis and the asset’s fair market value at the time of the swap. This applies to all token-for-token trades, including stablecoins, and requires accurate tracking of dates, values, and fees.
Example: Suppose you bought 2 UNI for $10 each ($20 total). Months later, you swap the 2 UNI for AAVE when UNI is worth $15 each ($30 total) on Uniswap. Capital Gains = $30 – $20 = $10. |
Also Read: How are Stablecoins Taxed in the USA?
Adding and Removing Liquidity from Pools
Adding liquidity often triggers a taxable event because receiving LP tokens can qualify as a crypto-to-crypto trade.
Moreover, removing liquidity is also a disposal, as exchanging LP tokens for underlying assets may generate gains. Tax applies when the value you receive differs from your cost basis.
Example: You deposit $300 worth of USDC and ETH into a Uniswap pool and receive LP tokens worth $340. Capital Gains = $340 – $300 = $40. When you later redeem the LP tokens, the returned assets may trigger another gain. |
Receiving Liquidity Pool Rewards
Rewards issued for providing liquidity are treated as ordinary income when received. The IRS requires reporting the tokens’ fair market value in USD on the day they become accessible. Later selling or swapping these tokens triggers Capital Gains Tax, using the declared income value as your cost basis.
Example: IIf Curve Finance distributes 5 CRV tokens to your wallet and they’re worth $5.60 each, you must report 5 × $5.60 = $28 as ordinary income on the day the tokens arrive. |
DeFi Staking Rewards
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.
Example: If you stake LDO on Lido and receive 1.2 LDO worth $43 on the day it becomes claimable, you must report $43 as income. That $43 becomes the cost basis for future capital gains. |
Additional Read: Best Crypto Staking Platforms
Yield Farming Rewards
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. If returns simply increase the value of existing assets without issuing new tokens, no tax applies at that moment. 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.
Example: If PancakeSwap rewards you with 8 CAKE tokens worth $5 each, you report 8 × $5 = $40 as income. If a strategy boosts your deposit value instead of issuing new tokens, you’re taxed only when selling the increased-value asset. |
Borrowing Crypto in DeFi
Borrowing alone isn’t taxable because receiving a loan-backed asset doesn’t count as disposal. However, if a platform issues a token representing your collateral or loaned amount, this may be treated as a crypto-to-crypto trade. In such cases, any increase in value is subject to Capital Gains Tax.
Example: You deposit $500 worth of COMP as collateral on Aave and receive aTokens worth $560. This token swap may be treated as disposal, giving you a taxable gain of $560 – $500 = $60. |
Paying Interest in DeFi
Paying interest in cryptocurrency is treated as spending crypto on a service, triggering a disposal. Tax is applied to the difference between the crypto’s cost basis and its fair market value at the time of payment. Paying interest in fiat isn’t taxable.
Example: You repay your Aave loan using 0.01 ETH. If you purchased that ETH for $150 but its value at repayment is $190, the IRS sees this as spending crypto, meaning you recognize a gain of $190 – $150 = $40. |
Earning Interest Through DeFi Protocols
When protocols pay interest in new tokens, the IRS treats the fair market value as taxable income on receipt. If interest is reflected only as increased asset value without issuing new tokens, tax applies later as Capital Gains upon disposal.
Example: If Compound pays you 0.03 COMP in interest and it’s worth $18 total at the moment you receive it, you must report $18 of income. If interest accrues only as increased value without issuing new COMP, tax applies when you sell. |
Wrapped Tokens
Wrapping a token is considered exchanging one crypto for another, making it a taxable disposal. Even if values match closely, the IRS requires reporting the fair market value at the time of wrapping. Any increase over your cost basis results in Capital Gains Tax.
Example: You convert 1 BTC purchased at $30,000 into WBTC on Ethereum when BTC’s market price is $31,200. Even though WBTC mirrors BTC, this token swap is taxable, resulting in a gain of $1,200. |
Transaction and Transfer Fees
Transaction fees paid in crypto during trades increase your cost basis or reduce disposal proceeds. Transfer fees paid in crypto may count as a taxable disposal, as spending crypto is itself a taxable event. Accurate fair market value tracking is essential for correct reporting.
Example: If you transfer SOL from one wallet to another and pay 0.01 SOL as a network fee worth $6, the IRS views this as spending crypto, so you must report $6 as a taxable disposal. |
Play-to-Earn (P2E) Gaming Rewards
New tokens earned through gaming are taxable as income based on their fair market value when received. Later selling or trading them triggers Capital Gains Tax, calculated from the value previously recognized as income.
Example: If Axie Infinity rewards you with 3 AXS tokens for gameplay and each token is worth $4, you must report 3 × $4 = $12 as income on the day received. Selling later for more creates capital gains. |
Tax on Token Rebases
Token rebases adjust token supply without changing the total value held. The IRS has not issued specific rules, but many treat rebases similarly to stock splits, meaning no tax at the moment of adjustment. Keeping detailed records is still essential for calculating future gains or losses.
Example: If an OHM-style rebase increases your token count from 1 OHM to 1.1 OHM but the total value remains $100, no income is recognized immediately. Tax applies only when you later sell the tokens. |
How to Report Crypto DeFi Taxes in the USA?
Reporting DeFi taxes in the USA requires listing your capital gains and income on specific IRS forms. Each DeFi action, swaps, liquidity moves, staking, yield farming, airdrops, must go into the correct section of your Form 1040. Here’s a simplified breakdown of which forms apply to each type of activity.
Tax Category | IRS Form | Purpose | What You Report |
Capital Gains (Swaps, Trades, Liquidity Disposals) | Lists every taxable disposal of crypto | Asset description (e.g., “1.5 ETH”), date acquired, date sold, proceeds (USD), cost basis (USD), gas fees added to cost basis | |
Summarizes totals from Form 8949 | Short-term vs. long-term capital gains or losses | ||
Ordinary Income (Staking, Yield Farming, Airdrops, LP Rewards) | Reports “Other Income” | Line 8z: Total USD value of all rewards, airdrops, interest, and earnings received | |
Business Income (Only if DeFi is operated as a business) | Reports business income + allows expense deductions | Total business income and expenses; triggers 15.3% self-employment tax if used |
Also Read: How to Report Crypto on Taxes in the USA?
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 compliant, TurboTax ready tax 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.Start tracking your DeFi taxes with accuracy, speed, and confidence, without the manual burden. Try KoinX for free and stay fully IRS-compliant ahead of the upcoming tax deadline.
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.
Do I Have to Report Small DeFi Earnings Under $10?
Yes. The IRS requires you to report all crypto income, regardless of the dollar amount. Even rewards worth less than $10 must be included in your taxable income for the year. While these amounts may seem minor, the IRS still considers them compensation when received. Accurate reporting also helps avoid mismatches if future 1099 forms include those transactions.
How Do I Report Gas Fees for DeFi on My Tax Return?
Gas fees can reduce your taxable gains when tied directly to a disposal, such as swapping tokens or withdrawing liquidity. In those cases, you add the gas fee to your cost basis or subtract it from your proceeds. Gas fees for non-disposal actions, like transferring tokens between wallets, may not be deductible. Keep detailed records so your tax software or accountant can apply them correctly.
