How Is Crypto Lending and Yield Farming Taxed?

Crypto yield farming and lending are taxed in two ways: the rewards and interest you earn are ordinary income at their fair market value when you receive them, and disposing of tokens — including swaps into and out of pools — triggers capital gains or losses. Most people owe both, often on transactions they didn't realize were taxable.

The reason is simple: the IRS treats cryptocurrency as property, not currency. That single rule drives almost everything below. If you're new to the fundamentals, start with our overview of how cryptocurrency is taxed.

Crypto lending: interest is ordinary income

When you lend crypto through a platform or protocol and earn interest, that interest is ordinary income. You recognize it at fair market value in USD on the date you gain "dominion and control" — generally when the reward is credited and you can withdraw, transfer, or spend it.

The USD value at receipt also becomes your cost basis in the tokens you earned. When you later sell or swap them, you calculate a capital gain or loss against that basis. This is why tracking the receipt date and price matters so much — skip it, and you'll either overpay or underreport when you dispose of the coins.

A common trap: some lending platforms auto-compound rewards. Each compounding event is arguably a new receipt of income, not a deferral. Reconstructing that after the fact by hand is painful, which is exactly the kind of thing automated pricing is built for.

Yield farming: the same rules, but more taxable events

Yield farming stacks several taxable moments on top of each other. Here's where they typically occur:

• Swapping to acquire the right tokens. Trading ETH for USDC to enter a pool is a disposal of ETH — a capital gain or loss event, even though you never touched dollars.
• Earning reward tokens. Governance or incentive tokens (the "farm" yield) are ordinary income at fair market value when received, just like lending interest.
• Selling or swapping those rewards. Disposing of reward tokens later is a separate capital gains event, measured against the income value you already recognized.

The mechanics of reward tokens mirror crypto staking taxes — income on receipt, capital gains on disposal — so if you understand one, you understand the other.

Liquidity pools and LP tokens

Depositing two assets into a liquidity pool is the murkiest area, because the IRS has not issued specific guidance on whether receiving an LP token is itself a taxable disposal. Two reasonable positions exist:

• Conservative treatment: depositing assets and receiving an LP token is a crypto-to-crypto exchange, so you realize gain or loss on the assets you contribute, and your LP token takes a new basis.
• Non-realization treatment: the LP token is merely a receipt for assets you still beneficially own, so no disposal occurs until you actually withdraw.

Both are defensible, but you must apply your chosen method consistently and keep records. When you exit the pool and burn the LP token, you'll also account for any change in the underlying assets' value — including impairment from impermanent loss, which only becomes a realized loss when you actually withdraw.

Cost basis is now per-wallet

Starting with the 2025 tax year, the IRS requires per-wallet (per-account) cost basis rather than a universal pool across all your holdings. You can no longer average basis across every wallet and exchange. Each wallet and account tracks its own lots, which matters enormously in DeFi, where assets move between your own wallets before ever hitting a protocol.

Form 1099-DA and reporting

Beginning in 2025, custodial exchanges and brokers began issuing Form 1099-DA to report digital asset proceeds. Note the limits: most DeFi protocols and self-custody wallets do not issue these forms, so the burden of tracking farming income and swaps falls on you. A 1099-DA from a centralized platform (see our Coinbase tax documents guide) won't capture your on-chain activity.

You'll generally report:

• Capital gains and losses (swaps, pool entries/exits, reward sales) on Form 8949 and Schedule D.
• Ordinary income (lending interest, reward tokens) on Schedule 1, or Schedule C if the activity rises to a trade or business.

Practical tips to lower the pain

• Record the USD value of every reward at the moment of receipt — that's both your income and your future basis.
• Remember that every swap is a taxable disposal, even stablecoin-to-stablecoin.
• Consider harvesting losses on underperforming positions before year-end; explore more ideas in our tax strategy hub.
• Keep wallet-level records so your per-wallet basis holds up.

For a broader look at protocol-level activity, browse the DeFi and staking category.

This article is general information, not tax advice. Consult a qualified professional about your specific situation.