Interest Income

Every time a lending platform pays you yield, that payment is interest income — and the IRS treats it the same way it treats the interest on a savings account. Doesn't matter if you're earning it in ETH, USDC, or some platform token. You earned something of value, so you owe tax on it.

This matters because most crypto lenders think about yield in APY terms and forget about the tax drag entirely. A 10% APY sounds great until you're in the 32% federal bracket and your real return is closer to 6.8%.

How It Works

When a platform credits interest to your account — daily, weekly, or monthly depending on the protocol — that credit is a taxable event at the moment it hits. The taxable amount is the fair market value of the tokens you received, in USD, on that exact date.

Say you hold 10,000 USDC on a lending platform and it pays 5% APY, compounding daily. Each day you receive roughly $1.37 in USDC. That $1.37 is ordinary income. Multiply that across 365 days and you've got $500 in interest income to report — straightforward because USDC holds its dollar peg.

Crypto interest gets messier when the token fluctuates. If you earn 0.001 ETH when ETH trades at $3,200, you report $3.20 as income. If you later sell that 0.001 ETH at $4,000, you also owe capital gains tax on the $0.80 appreciation. One receipt, two potential tax events.

Why It Matters

Most platforms don't withhold taxes. They pay you gross, and the reporting burden falls entirely on you. If you're earning yield across multiple platforms and chains, tracking cost basis for hundreds of micro-payments becomes a real accounting problem — not a theoretical one.

What to Watch

The volume problem sneaks up on active lenders. Daily compounding on a large position can generate hundreds of taxable micro-transactions per year. Manual tracking is nearly impossible. If you're earning interest across multiple platforms, you need crypto tax software that can ingest transaction history — or you're guessing at year-end.