DeFi Taxes: How Lending, LPs and Swaps Are Taxed

For US taxpayers, DeFi taxes come down to two questions about every onchain action: did you dispose of a token, and did you receive new value? Swapping one token for another is a disposal and can trigger capital gains. Interest, LP fees and airdrops are generally ordinary income when you gain control of them. Borrowing usually isn’t taxable, but a liquidation is. For LP deposits, receipt tokens and wrapping ETH, the IRS still hadn’t issued specific guidance as of October 2026, so you have to pick a position and apply it consistently.

• Clear disposals: token-to-token swaps, selling for stablecoins, collateral sold in a liquidation.
• Clear income: lending interest, LP fee claims, staking rewards (Rev. Rul. 2023-14) and airdrops (Rev. Rul. 2019-24), valued at receipt.
• Unsettled: LP deposits and withdrawals, wrapping and bridging, and receiving liquid staking or receipt tokens.
• Form 1099-DA started with 2025 transactions on custodial brokers. The rule that would have covered DeFi front ends was repealed in April 2025, so most DeFi activity is self-reported.
• The UK treats many DeFi deposits as disposals under HMRC’s CRYPTO61000 guidance, and possible reform is still under review.

DeFi taxes in one table

This ledger maps common DeFi clicks to their likely US federal treatment. “Unclear” means the IRS hasn’t addressed the action directly. Rates and holding periods are covered in our capital gains tax on crypto guide, so they aren’t repeated here.

For other countries and the general framework, start with our crypto tax guide.

Swaps and wrapping: disposals or not?

The IRS treats crypto as property (Notice 2014-21). Its virtual currency FAQs say that exchanging one virtual currency for another is a taxable exchange. A swap on a decentralized exchange is no different from a trade on a centralized one. You realize a gain or loss equal to the fair market value of what you received minus your cost basis in what you gave up. That applies to stablecoin swaps too: going from ETH to USDC realizes your ETH gain.

Wrapping is less settled. When you wrap ETH into WETH, you send ETH to a contract and receive a token redeemable one-for-one. Two positions exist:

• Conservative: treat the wrap as a disposal of ETH and an acquisition of WETH. You record a gain or loss at the wrap, then a fresh basis in WETH.
• Non-disposal: treat WETH as the same economic asset in a different form, carrying your original basis and holding period across.

The IRS gave a partial hint without settling it. Notice 2024-57 exempted brokers from reporting wrapping and unwrapping transactions, along with LP, staking and lending activity, “pending further guidance.” That shows the agency sees these as open questions, not that they’re tax-free. The same uncertainty applies to moving a token across a bridge where you end up holding a wrapped representation. Because a prompt wrap usually produces very little gain or loss, the practical stakes often lie in holding periods and record-keeping rather than in the tax itself.

Liquidity pools: deposits, fees and withdrawals

Readers often ask whether LP tokens are taxable. The honest answer is that nobody knows for certain. When you add ETH and USDC to a pool, you usually receive an LP token, or an NFT position on concentrated-liquidity DEXs. If that counts as exchanging your tokens for a new, materially different asset, the deposit is a disposal. If you’re treated as keeping ownership of a share of the pool, it isn’t.

The choice affects the numbers:

• Under the disposal view, you recognize gain or loss on both tokens at deposit, take a basis in the LP token, and recognize gain or loss again at withdrawal on the tokens you get back. Impermanent loss shows up as a lower value at withdrawal, which produces a capital loss against your LP token basis.
• Under the non-disposal view, nothing happens at deposit. At withdrawal, you compare what you received with your original basis. Impermanent loss effectively reduces gain or adds loss at that point.

Fees are clearer. Trading fees you collect, plus any token incentives paid on top, look like ordinary income at fair market value when you claim them or when they’re credited to you. On pools that compound fees automatically into the position, practitioners differ on timing. Pick a method and apply it to every pool.

Many tax professionals advise the conservative disposal treatment for LP deposits where receipt tokens are freely transferable. Whichever position you take, document why, and don’t switch approaches from year to year to minimize tax.

Lending, borrowing and liquidations

Crypto lending tax on the income side is straightforward. Interest you receive is ordinary income, valued when it’s credited to you. On protocols where your receipt token balance grows over time, interest arguably accrues continuously. Many people record it when they withdraw or claim, while stricter approaches use periodic snapshots. The deposit itself raises the same receipt-token question as LPs. Supplying USDC and receiving an interest-bearing token may or may not be a disposal. Because the gain on a stablecoin deposit is usually tiny, this matters most when you supply volatile assets like ETH.

Borrowing isn’t income. A loan you must repay isn’t taxable when received, which is why borrowing against crypto is popular. The risk is liquidation. If your collateral’s value falls and the protocol sells part of it to repay your debt, that’s a disposal of the collateral. You realize gain or loss on the portion sold, measured against your basis, and the liquidation penalty is part of that economic loss. A liquidation during a crash can produce a taxable gain if you bought the collateral long ago at a much lower price, even though you’ve just lost money on the position.

Airdrops, points and liquid staking tokens

Revenue Ruling 2019-24 says tokens received in an airdrop following a hard fork are ordinary income when you have “dominion and control,” meaning you can sell or transfer them. In practice, most people and tax software apply the same principle to DeFi airdrops. Points programs complicate this. Points that can’t be transferred generally have no clear value until they convert into a claimable token. At that point the token’s fair market value is income, and it becomes your basis.

Staking rewards are income on receipt under Rev. Rul. 2023-14, which our staking rewards tax guide covers in detail. Liquid staking adds two more questions. Swapping ETH for a liquid staking token on a DEX is a swap, so it’s a disposal. Minting one directly through the protocol is unaddressed by the IRS. Rebasing tokens, whose balance grows, are usually treated as producing income as the balance increases. Value-accruing tokens, whose exchange rate rises, are often treated as producing gain only on disposal. Neither treatment has been confirmed by the IRS.

What the IRS and HMRC have actually said about DeFi taxes

United States

• Notice 2014-21: virtual currency is property, and general property tax rules apply.
• Rev. Rul. 2019-24: airdropped tokens after a hard fork are income when you gain dominion and control.
• Rev. Rul. 2023-14: staking rewards are income when you gain dominion and control.
• Form 1099-DA: custodial brokers report gross proceeds for sales from 1 January 2025. Cost basis reporting applies to covered assets acquired from 1 January 2026.
• DeFi broker rule: Treasury’s December 2024 rule would have treated certain DeFi front ends as brokers. Congress repealed it under the Congressional Review Act, signed in April 2025. Most self-custodial DeFi activity therefore won’t appear on a 1099-DA, but it remains reportable by you.
• Notice 2024-57: temporary broker reporting relief for wrapping, LP, staking and lending transactions pending further guidance.

As of October 2026 we found no IRS ruling specifically on LP deposits, wrapping or lending receipt tokens.

United Kingdom

HMRC’s Cryptoassets Manual, section CRYPTO61000 (lending and staking, last updated 28 November 2025), sets a beneficial ownership test. If you transfer beneficial ownership of tokens when lending or providing liquidity, that transfer is a disposal for capital gains tax. For liquidity providers who receive a token in return, HMRC describes it as “an exchange of one token for another token.” Returns may be taxed as income or capital depending on their nature. The government consulted on a “no gain, no loss” approach for DeFi lending and staking. According to Deloitte’s summary of the 2025 response, no final decision on legislation had been made and no timeline was given.

Keeping records that survive an audit

• Export every wallet. Use block explorer CSV exports for each chain and address, and save them each year. Some front ends disappear and explorers change their formats.
• Log the price source. Record a consistent USD price source for each income event and disposal.
• Treat gas consistently. Gas paid to acquire a token generally adds to its basis, and gas paid on a disposal reduces proceeds. Gas on failed transactions and approvals is less clear, so document your treatment.
• Track basis per wallet. From 2025 the IRS requires wallet-by-wallet basis tracking, with a transition safe harbor under Rev. Proc. 2024-28.
• Write down your positions. Keep a one-page memo of how you treat wraps, LP deposits and receipt tokens.
• Check the software’s DeFi coverage. Tools vary widely in how they decode LP and lending transactions. Our crypto tax software comparison notes DeFi support, and you should still review auto-classified entries by hand.

More DeFi explainers are in our DeFi guides hub.

FAQ

Are LP tokens taxable when I receive them?

Possibly. The IRS hasn’t ruled on liquidity pool deposits. Under a conservative view, depositing tokens and receiving an LP token is a disposal that triggers gain or loss. Under another view, it isn’t a disposal until you withdraw. Fees and incentive rewards you claim are generally ordinary income either way. Choose a position, document it, and apply it consistently.

Is wrapping ETH taxable?

The IRS hasn’t said. Some taxpayers treat wrapping ETH into WETH as a disposal, which usually produces little gain or loss if done promptly. Others treat it as a non-taxable change of form. Notice 2024-57 only paused broker reporting for wrapping pending further guidance. Record the transaction either way.

Will DeFi transactions appear on Form 1099-DA?

Mostly no. Form 1099-DA comes from custodial brokers such as exchanges, starting with 2025 gross proceeds. The rule that would have covered DeFi front ends was repealed in April 2025. You’re still responsible for reporting DeFi gains and income yourself on your return.

Is DeFi income taxed as ordinary income?

Interest from lending, LP fees, liquidity mining rewards, airdrops and staking rewards are generally treated as ordinary income at fair market value when received. When you later sell those tokens, any change in value from that point is a capital gain or loss.

This article is general information based on IRS and HMRC publications as of October 2026. It isn’t tax or legal advice. Consult a qualified tax professional about your situation.

Crypto is volatile and risky; this is education, not financial advice. Do your own research.