In the US, when it comes to earning passive income through crypto ventures, staking and yield farming are some of the most popular strategies. But like many other transactions, the IRS treats staking and yield farming as taxable events, much to the dismay and shock of inexperienced investors. At Onchain Accounting, we have been the crypto CPA for hundreds of investors venturing into the world of crypto and looking to keep their books in order. In this post, we will explain how staking and yield farming work and are taxed in the USA.

What is staking?

Staking is the process that allows you as a crypto investor to earn rewards by supporting the operations of blockchain networks. In exchange for validating transactions and maintaining network security, you will be rewarded with more of the same cryptocurrency you are collecting. The rewards are given out by the network itself, without loaning your assets to anyone. Staking is straightforward and incredibly useful for growing your crypto assets in the long term.

What is yield farming?

Yield farming, also known as liquid mining, is a DeFi strategy where an investor deposits their digital assets into a DeFi protocol to receive rewards. The rewards, which typically take the form of the platform’s governance tokens, are designed to encourage community participation and increase the flow of liquidity. While yield farming can change from protocol to protocol, the process generally involves locking tokens in smart contracts, which are designed to award tokens only when the conditions of the contracts are fulfilled.

How are staking and yield farming taxed in the US?

In the United States, the IRS has not issued any specific guidelines on the taxing of staking and yield farming. That being said, it applies the tax framework adopted for other crypto activities such as mining and trading, making staking and yield farming open to income and capital gains tax.

Income Tax 

When you receive tokens from staking and yield farming, the transaction will be taxed as ordinary income at the fair market value calculated in USD on the day you receive the token. These amounts are added to make up the annual income tax, which you will be charged at a marginal income tax rate.

Capital Gains Tax 

When you dispose of the crypto assets you have received from staking and yield farming, they will be subject to capital gains tax. The capital gains you have received will be calculated by subtracting the cost basis from the selling price. Depending on when you dispose of the asset, you may be subject to:

• Short-term capital gains tax—when you have held the assets for less than a year.
• Long-term capital gains tax—when you have held the assets for more than a year.

Conclusion 

Staking and yield farming are simple, efficient, and popular ways investors grow their crypto holdings. In the US, these activities are considered taxable events, similar to buying, selling, and transferring crypto assets. When dealing with these transactions, it’s important to keep your books in order, and that is where Onchain Accounting can help.

We specialize in crypto accounting and bookkeeping and have helped hundreds of clients over the last decade, and we would like to help you as well. Enjoy the benefits of growing your wealth while keeping your books in order and IRS compliant with Onchain Accounting.