DeFi Taxation Explained: Staking, Lending, Wrapping & More
If you’ve dabbled in DeFi, you might be sitting on a tax headache. From staking rewards to yield farming to wrapping tokens, the IRS is paying attention – and so should you.
Here’s how your passive crypto income might be taxed in 2025.
What Counts as a Taxable DeFi Activity?
DeFi (Decentralized Finance) allows you to earn, borrow, and lend crypto without a central authority. But each action may trigger a different tax treatment – depending on control, liquidity, and value exchange.
Common taxable DeFi activities include:
- Earning staking or interest rewards
- Lending assets to liquidity pools
- Yield farming and liquidity mining
- Token swaps or redemptions
- Wrapping or unwrapping tokens
- Receiving airdrops or bonuses from DeFi protocols
Any time you gain control over new tokens or realize value, the IRS likely considers it a taxable event.
Is Staking Taxed as Income?
Yes – in most cases, staking rewards are treated as ordinary income by the IRS.
If you’re staking coins and earning rewards (whether directly or through a validator), the FMV (fair market value) of those rewards at the time of receipt is taxable in the year you earned them.
Later, when you sell the staked tokens, you’ll also report capital gains or losses based on how the value has changed since you received them.
Tip: Keep a timestamped record of when each staking reward hits your wallet and its value in USD.
How Wrapping Tokens May Be Taxable
Wrapping a token (e.g., converting ETH to wETH) might seem like a simple technical transaction, but in tax terms, it could be treated as a crypto-to-crypto trade – and thus, a taxable event.
Why? Because you’re exchanging one asset for another, even if the value is pegged.
While the IRS hasn’t issued specific guidance on wrapping, most conservative tax pros recommend treating wraps and unwraps as realized events for now – especially when token values fluctuate.
Reporting Yield Farming Rewards
Yield farming often involves staking LP tokens, earning high APY returns, and receiving multiple types of rewards. Each of those reward tokens is likely ordinary income on the day you receive them.
Further complexity comes from:
- Gas fees
- Impermanent loss
- Auto-compounding protocols
Tracking each of these accurately is key to staying compliant. Failure to report them properly increases your audit risk – especially as DeFi data becomes easier for regulators to track.
Tools to Simplify DeFi Taxation
DeFi taxes are notoriously messy – but you don’t have to DIY everything. These tools can help:
- CoinTracker: Good for wallet syncing and transaction mapping
- Koinly: DeFi-friendly with clear gain/loss summaries
- CoinLedger: Strong support for LP tokens and staking income
- ZenLedger: IRS-form-ready output for complex portfolios
These platforms integrate with MetaMask, Ledger, major exchanges, and DeFi protocols to give you a consolidated tax report – great for both DIY filers and crypto CPAs.