DeFi tax: A guide to decentralized crypto reporting for 2025

Key takeaways

• The IRS treats most DeFi activity as capital gains or taxable income.
• Capital gains tax applies to crypto disposals, including any swaps between cryptocurrencies on DeFi protocols.
• Rewards from DeFi activities, such as staking, liquidity pools, and yield farming, count as taxable income.
• Although DeFi platforms don’t send tax forms like 1099s, taxpayers are responsible for calculating cost basis and sharing transaction details with the IRS.
• Since there aren’t explicit IRS rules about taxes for many aspects of DeFi, it’s best practice to take a conservative approach and document every transaction.

Bitcoin (BTC) inaugurated the crypto revolution, but decentralized finance (DeFi) takes the idea of peer-to-peer (P2P) currency to another level. Instead of focusing on value exchange across digital wallets, the pioneering programmers behind DeFi protocols are busy creating a self-sufficient financial ecosystem with intermediary-free access to global liquidity.

Anyone with a crypto wallet can tap into DeFi to swap tokens, earn yield, or take out crypto loans without credit checks or sharing personal identifiers. These distinctive features continue to attract people to the DeFi ecosystem, which currently has a global market cap of over $100 billion USD.

Despite DeFi’s status as a new frontier for financial activity, users aren’t free from tax obligations. The IRS taxes DeFi-related activities as either capital gains on profitable disposals or income for crypto rewards. Anyone exploring Web3 needs to monitor their transactions and prepare for DeFi tax implications. In this guide, we’ll lay out exactly what you need to know for tax season.

What’s DeFi?

DeFi refers to a range of counterparty-free financial services built into globally distributed blockchains. Decentralized applications (dApps) in DeFi protocols rely on automated programs called smart contracts, which detect network changes and execute pre-programmed instructions. Anyone who wants to use DeFi has to link a compatible self-custodial crypto wallet to take advantage of the protocol’s offering.​

A few of the most common services in DeFi include trading between cryptocurrencies on decentralized exchanges (DEXs), staking crypto, or borrowing and lending. Many DeFi platforms use smart contract-controlled liquidity pools with user-contributed funds to provide these offerings. For transparent governance, DeFi dApps often include on-chain voting through decentralized autonomous organizations (DAOs).

Is DeFi taxable in the US?

The IRS taxes DeFi-related transactions similarly to those on centralized exchanges (CEXs). Although the IRS hasn’t issued a specific rulebook for DeFi, its general guidance on capital gains and ordinary income taxes apply to every kind of crypto transactions, including those from DeFi platforms.

However, there are a few gray areas specific to DeFi taxes, like creating wrapped tokens, receiving and using synthetic tokens from liquid staking, or sending crypto across bridges. In these cases, the user receives digital assets that mirror the value of their initial investment, but they may also technically qualify as disposals. The IRS hasn’t formally ruled on these situations as of the time of writing.

To avoid triggering audits, taxpayers need to be transparent about and consistently record their DeFi-related transactions. Linking wallets to a crypto tax software like CoinTracker simplifies the process to help you navigate tax season more easily when the IRS implements new rules about DeFi’s gray areas.

Which DeFi transactions are taxable?

Taxable DeFi transactions fall into two broad categories. When someone disposes of a cryptocurrency, the IRS charges capital gains tax on any profit a trader realizes. And if users earn crypto as rewards on DeFi protocols, the IRS treats those tokens as income.

Although these general rules apply throughout the DeFi ecosystem, many situations have more nuanced tax requirements.

Is staking taxable?

Crypto staking is part of a consensus protocol on blockchains that use a proof-of-stake (PoS) algorithm. In this model, nodes lock (or “stake”) their cryptocurrency on the blockchain’s consensus layer to validate transactions and receive crypto rewards for helping the system run. For extra convenience, many DeFi protocols and self-custodial wallets allow users to delegate their digital assets to a node operator and receive rewards without giving control to a third party like a CEX.

If someone chooses to stake crypto in DeFi, these cryptocurrencies are treated as taxable income. Traders must report the fair market value (FMV) of each staking reward at the time of receipt, which serves as the cost basis for each token. If someone chooses to sell their staking rewards later, they’ll have to report these disposals and calculate the difference between their cost basis and proceeds for capital gains tax.

The tax implications of depositing or withdrawing crypto from a staking protocol aren’t as clear-cut. According to IRC §1001 and Reg §1.1001-1, a disposition or transfer only occurs when there’s a clear exchange and the property received differs from the property given up. Under this definition, it’s difficult to argue that staking crypto is a taxable disposal, since taxpayers don’t receive anything new from this transfer. It’s only in more complicated cases, such as liquid staking, that the IRS may consider staking deposits as disposals.

Unlike traditional (illiquid) staking, liquid staking involves depositing a blockchain’s native cryptocurrency to receive a tokenized version of the original deposit. For example, on the DeFi protocol Lido, users send Ethereum (ETH) to receive an equivalent amount of Lido Staked Ethereum (stETH). Even though stETH’s price mirrors Ethereum’s, transfers between ETH and stETH are still considered a disposal and liable to capital gains tax. Any activities in DeFi that involve using stETH before redeeming their ETH deposit are also taxable, depending on the nature of the transaction. To comply with IRS requirements in these more nuanced cases, the best practice is to keep meticulous records of your transactions.

Are liquidity pool deposits, withdrawals, or rewards taxable?

Liquidity pools are smart contract-controlled mechanisms used on many DeFi protocols to simultaneously attract funds and offer crypto to users. In this arrangement, anyone with compatible cryptocurrencies in their self-custodial wallet can become a liquidity provider (LP) by locking those cryptocurrencies into the liquidity pool. The pool opens the coins for use by others for activities like trading. As long as these cryptocurrencies remain in the liquidity pool, the LP receives a portion of the fees generated by daily activity.

The simplest policy in a basic LP trading scenario considers token rewards received through liquidity mining as taxable income. The FMV of these crypto rewards serves as both taxable income and the cost basis for future disposals.

The LP tokens issued by many protocols are one reason liquidity pools are so difficult to account for. When someone deposits crypto into a liquidity pool, the dApp often provides LP tokens as a receipt for their share of the pool. LPs use these tokens to claim their initial deposit when they want to withdraw. If the IRS deems LP tokens “materially different assets” rather than merely a receipt, it could mean those crypto trades would become subject to capital gains tax.

Another tax difficulty with crypto in liquidity pools has to do with changes in pool composition that alter an LP’s position. The algorithms in DeFi protocols strive to balance cryptocurrencies across each liquidity pool, which means LPs may have different token ratios as market dynamics shift.

If LPs withdraw their crypto from a liquidity pool when the composition doesn’t match their initial deposit, they’ll face more complex cost basis calculations to account for this new balance. For example, if an LP locked their assets in when the liquidity pool had a 75/25 split between ETH and Basic Attention Token (BAT) and shifted to a 50/50 split, the oversupply of BAT in the pool means the LP might end up with more BAT than they originally deposited – if the price also falls relative to ETH.

In these complex cases, it’s particularly helpful to use a tool like CoinTracker’s Portfolio Tracker that automatically records and calculates these transaction details.

Are DeFi loans taxable?

DeFi protocols like Aave and Compound specialize in P2P lending. Users can deposit crypto collateral, take out a loan, and repay it from their wallet at pre-agreed interest rates. Although there’s no tax specifically for taking out one of these loans, there are several parts of the process that could trigger a taxable event.

For example, depositing crypto collateral could be considered a disposal if the DeFi platform transfers a protocol-specific token to the user as a receipt (like liquidity pools). Each loan repayment on the principal deposit may also be a disposal, since users must spend cryptocurrency with each transaction. If the collateral is liquidated, the IRS will likely treat the event as a taxable disposition and require the loan holder to report the capital gain or loss.

Is borrowing in DeFi deductible?

The IRS doesn’t have specific rules for what qualifies as tax-deductible from DeFi loans, but it’s possible that similar policies for traditional loans apply to their crypto counterparts. If taxpayers can show they used the borrowed funds for investments, business expenses, or on a qualified residence, it’s more likely the IRS will consider the interest related to those loans as tax-deductible. However, if crypto traders use their loan for personal expenses, such as buying goods and services, the IRS probably won’t recognize the interest expense as a deduction.

Since there aren’t any clear guidelines for DeFi interest expense deduction, traders who want to write off their interest expense will need to present a solid case with evidence to the IRS, including a detailed transaction history. It may also help to consult a CPA to properly file and prove the validity of these deductions.

Are DeFi airdrops taxable?

Like staking rewards, any free cryptocurrencies (aka crypto airdrops) received for supporting certain protocols or participating in DeFi dApps count as taxable income. The taxes are based on the FMV at the time of receipt. If someone decides to sell their airdropped tokens, they’ll use this FMV as the cost basis to compare with their proceeds and determine capital gains.

Are governance tokens taxable?

In an effort to promote distributed leadership, many DeFi protocols use governance models like DAOs where everyone has the power to participate in decision-making. In many cases, these blockchains use protocol-specific governance tokens to signify votes on proposed updates. Whether these governance tokens carry tax implications depends on how traders acquire and use them in DeFi.

When a DeFi protocol sends governance tokens as rewards to users, they’re taxable income. However, if traders buy governance tokens on a CEX like Coinbase as an investment or to participate in voting, there’s generally no tax implication. It’s only after a trader sells or swaps the governance tokens that they have to pay capital gains tax on any profits relative to their cost basis.

How do I report DeFi taxes for 2025?

The key to DeFi tax reporting is documenting every crypto transaction. Because activity on dApps occurs outside centralized institutions, DeFi users are responsible for recording every detail of when and how much they spent, swapped, or earned.

Although it’s possible to use online tools like blockchain explorers to search for transaction histories associated with specific crypto wallets, linking these wallets to a crypto tax software like CoinTracker is the simplest solution. Since CoinTracker connects to most exchange APIs, public wallet addresses, and smart contracts all in one place, it’s easy to get a comprehensive view of crypto-related activities in one dashboard.

What forms do I use for DeFi gains and income?

The right DeFi tax forms depend on a trader’s yearly activity and whether they’re trading as a business, solo professional trader, or an individual. For most DeFi transactions, taxpayers focus on two sets of forms: one for capital gains (Form 8949 and Schedule D) and the other for income (Schedule 1, and Schedule C).

Form 8949 and Schedule D

Form 8949 is the primary document taxpayers use to record all the details of crypto capital gains, including DeFi activities like swaps and LP token redemptions. With each transaction, traders need to list the acquisition date, proceeds, and cost basis, and calculate gains or losses. The information on Form 8949 is then summarized on Schedule D.

Schedule 1 or Schedule C

Schedule 1 and Schedule C focus on income earned in DeFi. Whether taxpayers receive crypto through airdrops, staking rewards, or yield farming, they must report the FMV for each token on one of these documents. Schedule C is generally used by businesses, while Schedule 1 is for individuals who earn miscellaneous income from things like DeFi throughout the year.

Are DeFi transactions on the 1099-DA form?

Starting in the 2025 tax year, a new form called 1099-DA will provide taxpayers and the IRS with more insight into yearly trading activity. Although Form 1099-DA will include details on some taxable digital asset transactions, it won’t include any details on DeFi activity. 1099-DA only covers a limited range of crypto transactions that take place on U.S.-based CEXs like Coinbase and Gemini.

Cost basis tracking in DeFi

Cost basis is essential for calculating the capital gain or loss for crypto disposals. You can subtract the cost basis from the FMV of a digital asset at the time of sale to determine how much you gained or lost and the corresponding tax burden.

When crypto traders buy their digital assets on a CEX before using them in DeFi, the purchase price on their CEX is their cost basis. However, if someone receives crypto as an airdrop, a staking reward, or part of a liquidity pool, the FMV at the time they receive the tokens is their cost basis.

The two primary cost basis tracking methods are first in, first out (FIFO) and specific identification (Spec-ID), which includes approaches like highest in, first out (HIFO). Under FIFO, the first purchase of a digital asset serves as the cost basis for the first disposal. For example, if someone bought 1 ETH for $3,000 one year ago, bought another ETH for $2,500 one month ago, and then traded 1 ETH for 3,500 USDC on a DEX, the cost basis for this final transaction is $3,000. Therefore, the crypto trader has a realized gain of $500 that qualifies as long-term capital gains tax.

For DeFi traders who don’t favor FIFO, the IRS lets taxpayers opt into the Spec-ID method of cost basis calculation. With Spec-ID, taxpayers choose the cost basis for each disposal using their prior crypto purchases and rewards. If crypto traders don’t select which individual tokens represent their cost basis for each DeFi disposal, the IRS defaults to the FIFO method.

Although Spec-ID could potentially save DeFi users taxes by reducing proceeds, it requires meticulous note-keeping to avoid counting the same cost basis twice. Anyone thinking about using Spec-ID should consider using a crypto tax software like CoinTracker to automatically record all of their transactions, as well as a professional CPA, to reduce the risk of an IRS audit.

Simplify DeFi taxes with CoinTracker

Because DeFi transactions don’t take place on centralized ledgers and don’t require any identification tied to the account, traders need to be extra meticulous when recording their transaction history. The simplest way to take the stress out of DeFi tax filing is to link all of your public wallets with CoinTracker. Our Portfolio Tracker connects to thousands of smart contracts across DeFi to give you a comprehensive view of your Web3 activities. CoinTracker can also create reports similar to Form 8949 that are ready to ship to a CPA, TurboTax, or H&R Block​

Want a clear view of your assets at all times? With CoinTracker, link your wallets and exchanges to monitor your portfolio’s performance in real time. Create a free account and see why crypto investors trust us.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.

FAQ

What are the new IRS rules for cryptocurrency?

A notable update to the IRS’s crypto tax policy is the introduction of mandatory 1099-DA documents from CEXs. Starting in January 2026, any taxpayers in the United States with an account on a U.S.-based CEX will receive 1099-DA forms detailing their qualifying crypto disposals. Keep in mind many transactions won’t appear on a 1099-DA, and it doesn’t include a crypto user’s DeFi activity.

Is DeFi taxable?

Any DeFi-related transaction involving a disposal is subject to capital gains tax, while token rewards from activities like staking or liquidity pools are subject to ordinary income taxes. There are many other DeFi-specific transaction types that are in a gray area, which is why it’s best practice to record every transfer and report it to the IRS to reduce the likelihood of issues in the future.

How are taxes applied to DeFi transactions?

It depends on the type of transaction. Disposal events are subject to capital gains tax, while services that reward tokens for participating in protocols are subject to ordinary income taxes.

How can tax software help manage DeFi transactions?

Crypto tax software like CoinTracker links to public wallet addresses and can instantly recognize transactions that happen on DeFi smart contracts. By automatically connecting to the DeFi ecosystem, these tax solutions can create an accurate, organized transaction history to help you remain compliant with the IRS. CoinTracker also imports this data into reports mirroring tax forms, like Form 8949 and Schedule D, to make DeFi tax reporting easier.