Why staking and DeFi income is now taxable under IRS rules

Crypto platforms and tax advisors have begun notifying users that staking rewards, lending yields, and DeFi interest may be subject to taxation. Many users still associate crypto taxation only with selling assets, not with holding positions that generate yield.

The issue is not the cryptocurrency itself. US and EU regulators now focus less on basic asset purchases and more on income-generating crypto products. Understanding what triggers taxation, how different income types are classified, and what reporting changes arrive in 2026 can help users navigate evolving compliance requirements.

What counts as taxable crypto income

Simply buying USDT or Bitcoin, transferring it to a personal wallet, and holding the asset does not trigger taxation in most jurisdictions. Profit arises only upon sale. However, the classification changes when assets begin generating recurring rewards.

Staking, lending through platforms or DeFi protocols, Earn programs, and on-chain network rewards all generate income from assets rather than passive storage. Under tax law in many jurisdictions, this constitutes income generation and may require reporting. The distinction matters: holding crypto is not taxable, but earning yield from crypto often is.

Why Earn and lending products face scrutiny

Crypto platforms must comply with legal definitions that often differ from how users informally view digital assets. In the United States, cryptocurrency is officially classified as property, not currency. This classification means staking or lending rewards function as analogues to interest or dividends under traditional finance rules.

Platforms including Binance.US and other international services must account for accrued rewards, maintain payout histories, and provide reporting to regulators upon request. When users receive notifications about taxable income, this reflects regulatory classification rather than penalties. Income was received, and applicable tax systems may require declaration.

The same tax logic applies to DeFi protocols and on-chain staking. Even funds held in personal wallets that generate staking rewards may be interpreted as receiving economic benefit subject to taxation.

What actually changes in 2026

Starting in 2026, an expansion of taxation rules is planned to cover most types of income generated from crypto assets.

1) How the IRS classifies cryptocurrency

In the US, cryptocurrencies are not considered currency for tax purposes – they are officially classified as property. This applies to Bitcoin, Ethereum, USDT, NFTs, and other digital assets. Any crypto transaction is subject to the same rules as transactions involving traditional property such as stocks.

2) What is considered a taxable event

Taxes arise when specific actions occur: selling cryptocurrency for USD or another currency, exchanging one cryptocurrency for another (such as BTC to ETH), paying for goods or services with crypto, and receiving cryptocurrency as income through mining, staking, salary, or rewards. Even transfers between your own wallets may be taxable events if fees are paid in crypto.

Actions that do not trigger taxation include purchasing crypto with fiat, holding crypto without sales or conversions, and transferring between wallets you own – provided fees are not paid in cryptocurrency.

3) Two main types of crypto taxes

Capital gains tax: The IRS treats cryptocurrency as property, so any profitable sale or exchange is subject to capital gains tax. Short-term capital gains apply when assets are held for less than one year and are taxed at ordinary income rates ranging from 10% to 37%. Long-term capital gains apply when assets are held for more than one year, with lower rates typically 15% or 20% depending on income level.

For example, if you purchased BTC and sold it after 9 months at a profit, this is short-term income taxed at ordinary rates. If sold after 14 months, it qualifies as long-term gains with a preferential rate.

Ordinary income tax: If cryptocurrency was earned rather than purchased, the IRS treats it as ordinary income. Mining rewards, staking yields, and crypto received as salary or compensation are taxed as ordinary income at the time of receipt based on fair market value (FMV).

4) How US citizens report crypto activity

US citizens typically use IRS Form 1040 (Schedule D and Form 8949) for reporting cryptocurrency capital gains. Tax returns include a mandatory question: “Did you engage in any digital asset transactions during the year?” – which must be answered Yes or No. If crypto income was received, it must be reported as ordinary income.

Non-US citizens and residents follow tax reporting and payment rules applicable to the exchange or jurisdiction with which they interact.

5) New reporting rules (2025–2026)

Starting in 2025, the IRS is implementing Form 1099-DA (Digital Asset Information Return). Brokers will be required to report sales, exchanges, and other digital asset transactions to the IRS. This increases transparency and reduces the ability to avoid taxation.

6) Exceptions and planning

Proposed legislative changes include suggested de minimis thresholds that would exclude gains on transactions under $200 – currently under discussion in Congress.

Several legal strategies can reduce crypto tax liability. Holding crypto for more than one year qualifies gains for lower tax rates. Tax-loss harvesting – selling loss-making assets to offset gains – can reduce liability. Donating cryptocurrency to charity may provide tax deductions based on fair market value at the time of donation.