MSTR Cat

Crypto Law/Level II · Tax: the first trap/2.2 Income from crypto/Lesson 5

Lending and DeFi yield

How interest and yield from lending crypto are taxed in the US, why the loan itself may or may not be a disposal, and how much of DeFi the IRS has simply not addressed.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Borrowing against crypto instead of selling is not income and not a sale of the collateral; the catch is that a liquidation is a disposal with gain or loss, so keep loan-to-value conservative and record everything.
  2. Interest is ordinary income when received and controlled; holding the earned coins more than a year makes later growth long-term, with a 2026 0% band up to $49,450 taxable income (single).
  3. Where treatment is unsettled, such as receipt tokens or accruing yield, take a reasonable position, apply it consistently and consider Form 8275 disclosure to reduce accuracy-penalty exposure under section 6662.
  4. Losses from a scam entered for profit may be deductible as a theft loss under section 165(c)(2) once recovery is unlikely (CCA 202511015, not precedent); purely personal theft losses are largely barred.
  5. Read platform terms before depositing: whether you keep ownership decides bankruptcy outcomes and may decide whether the deposit is a disposal; self-custodied DeFi keeps control but leaves all record-keeping to you.

MaterialsIRS Notice 2024-57, section 3.05, on transactions described as lending of digital assetsInternal Revenue Code section 1058 (transfers of securities under loan agreements), on law.cornell.eduThe platform’s terms of use and your full deposit, interest and withdrawal history, or the transaction hashes for a DeFi protocol

Wonder

  1. Is the interest I earn on lent crypto taxed like bank interest?
  2. Does handing my coins to a lending platform count as selling them?
  3. What happens to my taxes if the platform collapses or the protocol is hacked?

Explore

  1. Lending crypto means handing coins to a borrower, a centralised platform or a smart contract in return for the promise of the same kind of coin back plus a payment. DeFi, short for decentralised finance, refers to lending, trading and similar services run by code on a blockchain rather than by a company holding your funds. Yield is the return, paid as interest or as extra tokens. The IRS has issued no ruling specifically on crypto lending. Under the general rule of section 61, interest and rewards are ordinary income at their dollar value when you receive them and can dispose of them, the same principle applied to staking in Rev. Rul. 2023-14 (lesson 2.2.2).
  2. Whether the loan itself is a disposal is unsettled in the US. Section 1058 of the Internal Revenue Code lets a lender avoid gain or loss when securities are lent under an agreement that returns identical securities, passes back payments such as interest and dividends, and leaves the lender’s risk and opportunity unchanged. It is written for stocks, bonds and similar securities, and the IRS has not said it covers crypto. Notice 2024-57 relieves brokers from reporting transactions described as lending of digital assets, from 1 January 2025, and expressly says no inference is intended about how they are taxed.
  3. Many DeFi lending protocols hand the depositor a receipt token that represents the deposit and grows in redemption value, or in number, as interest accrues. Two questions follow that published guidance does not answer: whether swapping coins for the receipt token is a taxable exchange (lesson 2.1.3), and whether the growth is income as it accrues or only when the position is closed. Taxpayers report in different ways. Whatever position is taken, it depends on records of what was deposited, what receipt tokens came back, what was withdrawn and when, which a block explorer can reconstruct for on-chain activity (lesson 2.3.7).
  4. Platform terms can decide ownership. When Celsius Network went bankrupt in 2022, its terms of use decided who owned the coins in its yield accounts (lesson 4.1.4). Losses from a collapse, hack or fraud raise their own tax questions. IRS Chief Counsel Advice 202511015, released in March 2025, concluded that scam victims who entered a transaction for profit could deduct a theft loss under section 165(c)(2) in the year there was no reasonable prospect of recovery, while purely personal theft losses were barred for 2018 to 2025. Chief Counsel Advice is not precedent, and losses are covered in lesson 2.3.3.
  5. Borrowing is the mirror image. Taking out a loan, with crypto as collateral, is not itself income or a sale of the collateral (lesson 7.3.4). But if the price falls and a protocol or lender sells the collateral to repay the loan, that liquidation can be a disposal of the collateral, with gain or loss measured against its basis (lesson 2.3.1), even though the borrower received no cash. Liquidations can happen automatically and fast, so the record of each liquidation, including the units sold and the debt repaid, matters as much as the record of the loan.
  6. The United Kingdom has more detailed guidance. HMRC’s Cryptoassets Manual (page CRYPTO61620) says making a DeFi loan is a disposal for Capital Gains Tax where beneficial ownership of the tokens passes to the borrower or platform, and page CRYPTO61211 says returns may be income or capital depending on the facts. In a summary of responses published on 26 November 2025, the UK government said it was considering a no-gain, no-loss approach for transfers without an economic disposal, but had not legislated. A practical check: read the platform’s terms to see who owns deposited coins, and keep the deposit and withdrawal record. This is education, not tax advice.

Key facts

  • The IRS has not issued a ruling specifically addressing the tax treatment of lending crypto.
  • Section 1058 provides non-recognition for loans of securities under agreements meeting its conditions, and the IRS has not said it applies to crypto.
  • Notice 2024-57 relieves brokers from reporting transactions described as lending of digital assets occurring on or after 1 January 2025.
  • Notice 2024-57 states that no inference is intended about the substantive tax treatment of the transactions it covers.
  • Chief Counsel Advice 202511015 concluded that scam victims who entered a transaction for profit could deduct a theft loss under section 165(c)(2).
  • HMRC guidance treats making a DeFi loan as a disposal for UK Capital Gains Tax where beneficial ownership of the tokens passes to the borrower or platform.

Exercise nine, six, three, one

9CollectList up to 9 lending or yield arrangements you use or have read about, such as a centralised yield account, a DeFi lending pool, a receipt token, a loan against crypto or a liquidation.
6ClusterSort them into 6 categories: interest paid in coins, receipt tokens, deposits into a platform you do not control, loans you took out, liquidations, and losses from a collapse or hack.
3DistillReduce the 6 categories to 3 groups: clearly income, possibly a disposal, and questions current guidance does not answer.
1CrystallizeWrite 1 sentence describing the single record you would most need if the IRS asked how your DeFi yield was calculated.

Fact check

Dates, figures and claims checked against the published sources listed below.

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