How to Report DeFi Earnings to the IRS in 2025

The Rise of DeFi and the IRS’s Watchful Eye

Decentralized Finance (DeFi) has exploded in popularity, offering crypto users everything from yield farming to staking and liquidity pools—all without traditional intermediaries. But with great freedom comes a not-so-great reality: the IRS wants its cut. Whether you’re casually earning interest from stablecoins or aggressively farming altcoins across chains, those gains are still taxable. And the IRS is getting smarter about tracking them down.

If you’ve made money in DeFi in 2024 or 2025, you need to know how to report those earnings the right way. It doesn’t have to be overwhelming—but ignoring it could cost you more than you think.

What the IRS Considers DeFi Income

The IRS doesn’t care if your crypto came from a slick smart contract or a traditional bank—it wants transparency. Here’s how different DeFi activities are treated:

• Staking Rewards & Lending Interest: These are typically treated as ordinary income at the time you receive them. So if you earned $1,000 in staking rewards, that’s $1,000 of taxable income—even if you never sold the tokens.
• Yield Farming & Liquidity Pool Gains: If you provide liquidity and earn fees or tokens, those rewards are also considered income. Then, any change in the value of the asset when you withdraw it could be a capital gain or loss.
• Swapping Tokens on DEXs: Trading on decentralized exchanges (DEXs) counts the same as trading on centralized ones. Every swap is a taxable event.
• Airdrops & Incentives: If you received an airdrop or protocol incentive, you’re taxed on its fair market value the day you received it.

Keeping Track of DeFi Transactions

With DeFi, you often interact with multiple wallets and dozens of tokens across chains like Ethereum, Arbitrum, or Solana. Here’s what helps:

• Use a Crypto Tax Software: Tools like Koinly, CoinTracker, and TokenTax can automatically track wallets and calculate your taxable events across protocols.
• Maintain Wallet Records: Even if you use MetaMask or a hardware wallet, export transaction histories regularly and tag the purpose of each transfer.
• Understand Cost Basis: You’ll need to know how much you paid (in USD) for each token, especially when you later trade or earn income with them.

Pro Tip: Use platforms that generate Form 8949 or Schedule D reports—you'll need those at tax time.

Reporting DeFi Earnings Step by Step

When filing your taxes, here’s how DeFi earnings typically show up:

• Form 1040 - Schedule 1: For staking rewards or other income not related to employment.
• Form 8949: For any capital gains or losses from token trades, liquidity pool withdrawals, or asset swaps.
• Schedule D: Summarizes your total capital gains and losses.
• Form 1099s: Some centralized platforms now issue 1099 forms, but most DeFi protocols do not—so you're responsible for keeping accurate records.

Even if you didn’t cash out to fiat, your crypto-to-crypto swaps are still reportable. The IRS has made it clear: “I didn’t know” won’t fly in an audit.

Avoiding Red Flags and Staying Compliant

If you’ve been using bridges, wrapped tokens, or high-volume swaps, the IRS may consider your activity substantial. Here are some things to avoid:

• Don’t Hide Wallets or Addresses: Trying to “forget” a wallet that received income could be considered fraud.
• Don’t Assume DeFi Is Anonymous: Blockchain transactions are traceable. The IRS partners with analytics firms to connect the dots.
• Avoid Wash Trading: Selling a token and rebuying it quickly to harvest losses may not fly under the radar.

Final Thoughts: Stay Ahead, Stay Clean

DeFi isn’t a tax-free playground anymore. Whether you’re passively staking or knee-deep in perpetuals, it’s critical to treat your crypto finances with the same attention as your fiat income. The good news? Reporting your DeFi earnings doesn’t have to be hard—it just takes the right tools and a bit of discipline.

“When in DeFi, do as the IRS expects.”

Stay compliant, use the tech at your disposal, and enjoy the freedom of decentralized finance without the stress of a surprise audit.