Are you a cryptocurrency investor with a long-term strategy? If yes, then you must not skip the idea of earning income on your digital assets.
Using crypto to generate interest will offer you passive income, and if the cryptocurrency markets continue to increase, your gains will multiply.
There are a number of exchanges (both centralized and decentralized) that offer crypto interest. But before stepping into the murky waters of DeFi earning, let us understand what cryptocurrency is, and how you can earn interest in crypto. Additionally, we’ll also discuss how crypto interest is taxed and how reporting them with ZenLedger is a breeze.
What is Cryptocurrency?
To answer this question in the simplest words, cryptocurrency is decentralized digital money that can be used over the internet.
Bitcoin was the first cryptocurrency, launching in 2008, and it is still the most popular, impactful, and well-known. Since then, Bitcoin and other cryptocurrencies such as Ethereum have gained in popularity as digital alternatives to government-issued fiat money.
You must keep in mind that holding cryptocurrency does not imply that you own anything physical. You simply own a key that enables you to transfer digital or virtual currency from one person to another without the involvement of a trustworthy third party.
However, a very important question must be asked: is there tax on cryptocurrency?
Simply put, yes! But there are some ifs and buts around that. Let’s get a clear picture of how cryptocurrency is taxed.
How is Cryptocurrency Taxed? - Crypto Interest Taxes
In the Notice 2014-21, issued in the year 2014, the IRS declared that the vast majority of taxable acts involving digital assets will be subject to capital gains tax regulation, similar to how stocks are taxed. Cryptocurrencies earned through certain activities, on the other hand, are recognized as income and hence liable to income tax.
Capital Tax Events
- Selling crypto for fiat currency (U.S. dollar, Japanese yen, etc.)
- Making a purchase using cryptocurrency
- Trading or exchanging one digital asset for another is referred to as digital asset swapping (not to forget, it includes NFTs as well)
Income Tax Events
- Receiving crypto as airdrop or rewards such as bug bounties
- Block rewards and transaction fees are two sources of cryptocurrency mining revenue
- Any interest revenues from DeFi lending in crypto
- Liquidity pools and interest-bearing accounts generate cryptocurrency
But here’s one question for you. If you can purchase goods and services, and pay and save taxes like fiat money, should you also not be able to earn interest on your crypto?
Can You Earn Interest on Crypto?
The answer is yes!
You may earn interest on your crypto in the same way you can earn interest on fiat cash in a bank savings account - even compound interest.
The main distinction is that, in most cases, you will receive interest in bitcoin rather than fiat cash. This may be the same currency as the asset you've placed into a certain account. It may also be in a separate cryptocurrency, such as a Stablecoin or a liquidity pool token, in other cases.
How Can You Earn Interest on Crypto?
For a better understanding, let’s understand how you can earn interest on centralized and decentralized platforms.
For a long time, centralized exchanges have provided avenues for crypto investors to make money. You can, for instance:
- Lending your cryptocurrency for interest on Binance, as is a great way to make money.
- Create a cryptocurrency interest account, such as on BlockFi.
- Create a cryptocurrency savings account, such as one on Coinbase.
These diverse choices provided excellent interest rates, which were far greater than those provided by conventional banks and other financial institutions.
However, cryptocurrency investors are always on the lookout for the best returns.
Enter DeFi. DeFi has revolutionized the crypto sector by providing investors with new methods to earn interest on their idle assets.
Here are a few examples:
- Providing assets to DeFi lending apps like Aave's liquidity pools.
- Providing assets to DeFi exchange liquidity pools, such as Curve.
- Yearn, a DeFi yield farming tool, allows you to invest funds in vaults.
- Assets like Armor are being added to DeFi insurance liquidity pools.
- Put money into a DeFi savings account, such as Oasis.
Now that you have a clear understanding of interest in crypto, let’s answer one of the most important questions: how is crypto interest taxed?
What About Taxes on Crypto Interest? - Cryptocurrency Interest Tax
Taxes on crypto interest are of two kinds as mentioned above: it is taxed either as income or as a capital gain.
When it comes to cryptocurrency interest, tax officials will most likely see it as a form of income, comparable to a dividend or bonus, and charge income tax. When you earn cryptocurrency through interest, this is the situation. You just use the fair market value (FMV) of the crypto asset to compute your earnings and taxes and declare this as extra income on your yearly tax return.
While cryptocurrency interest is liable to income tax, any profit made through selling, trading, spending, or giving it is subject to capital gains tax. This is because crypto is treated as an asset, similar to a stock, and any disposition of an asset is treated as a capital gain or loss for tax purposes.
Using ZenLedger to Calculate Interest and Crypto Taxes
All of the tax, crypto tax, and crypto interest tax might really sound confusing.
But there’s nothing to worry about. Platforms like ZenLedger are making it easier for you to calculate your taxes and file tax forms.
All you have to do is import, review, and download.
Import your transaction report from the long list of exchanges and wallets they have integrated with. Then review your previous crypto taxable income and finally, generate your crypto tax forms.
The Bottom Line
As the realm of decentralized finance (DeFi) develops, more sites are introducing cryptocurrency interest accounts. Similar to regular savings accounts, crypto interest accounts allow you to stake your coins for a period of time to receive interest.
But make sure you’re clear about the tax front if you’re thinking about trying it out.
ZenLedger can help you easily calculate your crypto taxes, and also find opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!