As the Web3 ecosystem rapidly evolves, tax authorities worldwide—including the IRS—are struggling to keep pace. For U.S. taxpayers, this fast-moving innovation brings new financial opportunities—and new tax obligations. Understanding how decentralized finance (DeFi) and non-fungible tokens (NFTs) are treated under current U.S. tax law is essential for compliance and smart financial planning.
In the United States, cryptocurrency is classified as property, not currency—similar to stocks or real estate. This means every transaction involving crypto can have tax implications. Gains are subject to capital gains tax, while income from rewards or services is typically taxed as ordinary income. Whether you’re swapping tokens on a decentralized exchange or minting digital art, the IRS wants to know.
This guide breaks down the tax treatment of key DeFi and NFT activities, helping you stay compliant in 2025 and beyond.
🔁 DeFi Trading: Crypto-to-Crypto Swaps Are Taxable Events
Trading one cryptocurrency for another on platforms like Uniswap or SushiSwap is considered a taxable event by the IRS. Just like selling stocks, every swap triggers a capital gain or loss.
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For example:
- If you bought 1 ETH for $2,000 and later swapped it for 200 DAI when ETH was worth $3,000, you’ve realized a $1,000 capital gain.
- Even if you don’t cash out to fiat, the IRS sees this as a disposal of property.
Keep detailed records of each trade’s date, value in USD, and cost basis. These details are crucial for calculating gains accurately.
💸 Borrowing Crypto in DeFi: No Tax on Loan Proceeds
When you use your crypto as collateral to borrow stablecoins or other assets on platforms like Aave or Compound, the loan amount is not taxable. Borrowing doesn’t count as income—just like taking out a mortgage doesn’t trigger taxes.
However:
- The collateral you lock up retains its original cost basis.
- Repaying the loan (plus interest) has no tax impact.
Just be cautious: if your position is liquidated, that’s a taxable disposal of your collateral.
🏦 Lending Crypto: Interest Income Is Taxable
Earning yield by lending your crypto on DeFi protocols generates ordinary income, taxed at your marginal rate.
For instance:
- Lending ETH on Aave and receiving aETH or interest in ETH? That interest is taxable when received.
- The IRS treats this like earning interest from a savings account.
But what about yield-bearing tokens like staked OHM (sOHM) or rebased AMPL?
- These don’t pay regular interest but increase in value over time.
- When you sell or exchange them, the gain is subject to capital gains tax—not income tax—because no income was “received” in traditional form.
🔐 Staking Rewards: Income or Capital Gain?
Staking involves locking crypto to support a blockchain network (e.g., Ethereum 2.0, Cardano) and earning rewards in return.
The IRS hasn’t issued clear guidance, but most tax professionals treat staking rewards as ordinary income when received—similar to interest or mining income.
However, a notable court case (Jarrett v. IRS) challenges this view. A couple who staked Tezos argued that staking is more like “property creation” than income generation and should only be taxed upon sale. The outcome could reshape staking taxation.
Until clarity arrives:
- Report staking rewards as income at fair market value when received.
- Consult a crypto-savvy CPA to navigate gray areas.
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💡 Earning Tokens: Mining, Airdrops & Governance Rewards
Many DeFi platforms reward users with tokens for participation. These include:
- Liquidity mining rewards (e.g., COMP, SUSHI)
- Airdrops
- Play-to-earn (P2E) tokens
- Governance tokens
All are generally treated as ordinary income at the time you receive them, valued in USD.
Important distinction:
- If you buy COMP on an exchange, future gains are capital gains.
- If you earn COMP by supplying liquidity, the value of COMP when received is taxable income.
This applies even if you never touch fiat—crypto-to-crypto rewards still count.
🌊 DeFi Liquidity Mining: Complex but Taxable
Providing liquidity to pools on Uniswap or Curve involves depositing two assets into a smart contract and receiving LP (liquidity provider) tokens in return.
Tax treatment isn’t officially defined, but common practice treats:
- Adding liquidity: Not a taxable event (like depositing cash into a brokerage).
- Earning fees or rewards: Taxable as income when received.
- Withdrawing liquidity: A crypto-to-crypto swap. Any change in asset ratio triggers capital gains/losses.
- Impermanent loss: Counts as a capital loss if the value of your withdrawn assets is less than your deposit basis.
Because LP positions can fluctuate significantly, tracking your cost basis per token is critical.
🖼️ Buying NFTs: Gas Fees and Capital Gains
Purchasing an NFT with cryptocurrency (e.g., ETH on OpenSea) is a taxable event.
Why?
- You’re selling ETH to buy the NFT.
- If your ETH has appreciated since purchase, you owe capital gains tax on the difference.
Example:
- Bought 1 ETH for $1,800
- Spent it to buy an NFT when ETH was worth $3,000
- $1,200 capital gain → taxable
Note: Buying NFTs with fiat currency (e.g., credit card via payment processor) is not taxable, as no crypto was sold.
Also, gas fees paid during purchase should be added to the NFT’s cost basis—they’re part of your investment.
🔥 Selling NFTs: Capital Gains Apply
Selling an NFT for profit triggers capital gains tax, regardless of what you receive—ETH, USDC, or USD.
Holding period matters:
- Short-term gain (held ≤1 year): Taxed at ordinary income rates.
- Long-term gain (held >1 year): Lower rates apply (0%, 15%, or 20%).
Even trading one NFT for another? That’s two taxable events: selling the first and buying the second.
⚙️ Minting NFTs: Creation vs. Purchase
“Minting” has two meanings:
- Creating an NFT (as an artist)
- Being the first buyer of an NFT during a public drop
Creating an NFT
- Not a taxable event.
- No income is generated—you’re just recording data on-chain.
- However, gas fees increase your cost basis if you later sell it.
Buying a Minted NFT
- Same as buying any NFT with crypto → taxable disposal of your ETH or other currency.
- Capital gains apply if your crypto has appreciated.
💼 Selling a Self-Minted NFT: Ordinary Income
If you create an NFT and later sell it, the revenue is considered ordinary income, not capital gains.
Why?
- You’re selling something you produced—like an artist selling a painting.
- The IRS views this as business income or self-employment income.
You may also be eligible for deductions related to creation costs (software, hardware, gas fees).
❓ Frequently Asked Questions (FAQ)
Q: Are DeFi yields always taxable?
A: Yes—if you receive new tokens as rewards (interest, liquidity mining), they’re taxable as income when received.
Q: Do I pay tax when I add liquidity to a pool?
A: No—adding liquidity isn’t a taxable event. But earning fees or removing liquidity is.
Q: Is staking taxed differently than lending?
A: Currently, both are usually treated as ordinary income. However, legal challenges may change staking rules in the future.
Q: What if I lose money in DeFi? Can I claim losses?
A: Yes—capital losses from impermanent loss or failed projects can offset gains and up to $3,000 of ordinary income annually.
Q: How do I report NFT sales on my taxes?
A: Report each sale on Form 8949 and Schedule D. Include date acquired, date sold, cost basis, sale price, and gain/loss.
Q: Can I avoid taxes by using privacy-focused wallets or chains?
A: No—the IRS can trace transactions through exchanges and blockchain analytics. Tax evasion carries serious penalties.
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Core Keywords:
- Web3 tax
- DeFi taxation
- NFT taxes
- Crypto capital gains
- Staking rewards tax
- Liquidity mining tax
- U.S. crypto tax
- Minting NFT tax
By understanding these principles and maintaining accurate records, U.S. Web3 users can confidently navigate DeFi and NFT taxation while staying compliant with IRS regulations. As regulations evolve, staying informed—and using reliable tools—is your best defense against surprises at tax time.