DeFi Tax Reporting: What You Actually Need to Know in 2026

I've spent years helping clients untangle their DeFi tax situations. Some come to us with a few hundred transactions across two or three protocols. Others show up with 50,000+ transactions spread across Ethereum, Arbitrum, Solana, and a dozen wallets they'd forgotten existed.

The common thread: almost everyone underestimates how complicated DeFi tax reporting actually is.

Decentralized finance has revolutionized how crypto users earn, lend, borrow, and trade. But with that innovation comes complexity that the tax code was never designed to handle. The IRS has been playing catch-up, issuing new guidance and enforcement actions that have caught many DeFi users off guard.

This guide breaks down what you actually need to know: the common mistakes we see, what the IRS expects, and how to stay compliant without losing your mind.

How Is DeFi Taxed in the US?

The IRS treats cryptocurrency as property, not currency. This classification, established in IRS Notice 2014-21 and reaffirmed in subsequent guidance, means every disposition of crypto is potentially taxable.

For DeFi specifically, two types of tax apply:

Capital gains tax applies when you dispose of crypto by selling, swapping, or spending it. If you bought ETH at $2,000 and swapped it for another token when ETH was worth $3,000, you have a $1,000 capital gain. Short-term gains (assets held under one year) are taxed at your ordinary income rate. Long-term gains (over one year) get preferential rates of 0%, 15%, or 20% depending on your income.

Ordinary income tax applies when you receive new crypto as compensation, rewards, or earnings. This includes staking rewards, lending interest, airdrops, and liquidity mining rewards. The tax hits when you receive the tokens, at fair market value on that date.

The IRS Digital Assets page provides the official overview of how these rules apply.

What Changed in 2025-2026?

The past year brought significant regulatory shifts. Understanding where things stand helps you know what's required.

Form 1099-DA Is Now Required

Starting January 1, 2025, centralized exchanges began reporting transactions on the new Form 1099-DA. This is the first tax form specifically designed for digital assets.

For 2025 transactions (reported in early 2026), brokers report gross proceeds only. Starting in 2026, they must also report cost basis for "covered" assets—those acquired and held within the same broker account.

The IRS now has standardized, machine-readable visibility into your exchange activity. But brokers only report cost basis for assets that never left their platform. Transfer crypto to a personal wallet or bridge to another chain, and that tracking breaks. You're responsible for it yourself.

The DeFi Broker Rule Was Repealed

In April 2025, President Trump signed H.J.Res.25, repealing the IRS's "DeFi Broker Rule" that would have required decentralized protocols to report user data like traditional brokers. This was the first cryptocurrency bill ever signed into law.

DeFi protocols like Uniswap, Aave, and Curve won't send you 1099s. But your DeFi activity remains fully taxable. The repeal simply means you're responsible for tracking and reporting it yourself.

The IRS retains authority to audit using blockchain analytics. According to the Congressional Research Service, the IRS contracts with firms like Chainalysis to trace transactions across wallets.

Wallet-by-Wallet Cost Basis Tracking

Revenue Procedure 2024-28 eliminated the "universal wallet" method. Starting January 1, 2025, you must track cost basis separately for each wallet or account.

If you bought ETH on Coinbase, transferred to MetaMask, then bridged to Arbitrum, you need cost basis records for each location. You can no longer pool everything together.

How Is Staking Taxed?

Staking rewards are taxable as ordinary income when you receive them. Not when you sell. When you receive.

Revenue Ruling 2023-14 confirmed this treatment. The ruling states that staking rewards are includible in gross income in the taxable year in which the taxpayer gains "dominion and control" over the rewards.

For most proof-of-stake protocols, that's when the rewards hit your wallet.

One typical case we see: a client earned staking rewards daily for two years across Lido, Rocket Pool, and native ETH staking. They never reported any of it because they "hadn't sold anything." They owed income tax on every single reward, at the fair market value on each day received. Thousands of taxable events they'd never tracked.

Your cost basis in staking rewards equals the fair market value when received. When you eventually sell, you calculate capital gains from that basis. Learn more about staking tax rules in our US Crypto Tax Guide.

How Are Liquidity Pools Taxed?

DeFi liquidity pool taxation is complex because multiple taxable events can occur.

Entering a pool may be taxable. When you deposit tokens and receive LP tokens in return, the IRS may treat this as a crypto-to-crypto exchange, triggering capital gains based on the Cottage Savings doctrine. The tax treatment depends on the specific pool mechanics.

Rewards earned while providing liquidity are generally taxable as ordinary income when received. This includes trading fees distributed to LPs and any additional token incentives.

Exiting a pool triggers another potential taxable event. You're disposing of your LP tokens in exchange for the underlying assets, which may have changed in value.

Impermanent loss doesn't create a deductible loss the way you might expect. You may have lost value in real terms but still owe taxes on the individual transactions.

The IRS hasn't issued DeFi-specific guidance on every pool structure. We apply existing tax principles and document our methodology for each client.

How Are DeFi Loans Taxed?

Taking out a crypto-collateralized loan is generally not a taxable event. You're borrowing, not disposing of an asset. The IRS FAQ on digital assets confirms that borrowing itself doesn't trigger tax.

However, at CountDefi we have seen that several related events can be taxable:

Liquidation is a taxable disposal. If your collateral gets liquidated, that's treated as a sale at fair market value. You'll have a capital gain or loss based on your original cost basis in the liquidated assets.

Interest payments may have tax implications depending on how you pay them and whether the loan is for investment or personal purposes.

Receiving tokens when depositing collateral (like receiving aTokens on Aave) may be treated as a taxable exchange depending on the protocol structure.

How Are Wrapped Tokens Taxed?

Wrapping tokens (ETH to WETH, BTC to WBTC, ETH to stETH) may trigger a taxable event. The IRS hasn't issued specific guidance, but under the Cottage Savings doctrine, exchanging one asset for a "materially different" asset is a realization event.

The conservative approach treats wrapping as a taxable exchange. You'd recognize gain or loss based on the difference between your cost basis and fair market value at the time of wrapping.

Some practitioners take a more aggressive position that wrapping is analogous to depositing cash in a bank (not taxable), but this carries audit risk without explicit IRS guidance.

We generally advise clients to document both positions and choose based on their risk tolerance and overall tax situation.

Common DeFi Tax Mistakes

After years of reviewing DeFi portfolios, certain patterns emerge. These are the mistakes I see regularly that create the biggest problems for US DeFi investors:

Misclassifying Income Types

The IRS treats different DeFi activities differently:

• Staking rewards: ordinary income (Rev. Rul. 2023-14)
• Airdrops: ordinary income (IRS FAQ Q4)
• Swapping tokens: capital gain/loss (Notice 2014-21)
• Wrapped token conversions: potentially taxable exchange

Many users assume DeFi earnings are tax-deferred because they never converted to fiat. The IRS doesn't care. Receiving crypto triggers the obligation.

Failing to Track Cost Basis

DeFi users routinely interact with dozens of smart contracts across multiple chains. Without accurate cost basis records, you can't calculate gains correctly.

When cost basis tracking fails:

• You over-report or under-report capital gains
• Form 8949 submissions are inaccurate
• Audit risk increases with unverifiable data

The IRS expects "reasonable estimates" if exact records are unavailable, but missing documentation significantly increases audit risk.

Ignoring Gas Fees

Gas fees can be added to your cost basis (when acquiring) or subtracted from proceeds (when selling), reducing your taxable gain. The IRS guidance on transaction costs for property transactions applies to crypto.

Ignoring gas entirely overstates your gains. On Ethereum in 2021-2022, some users paid thousands in gas for single transactions. That's real money affecting your tax position.

Incomplete Multi-Chain Records

Most DeFi users operate across Ethereum, Arbitrum, Optimism, Polygon, Solana, Base, and more. If you're not aggregating all wallet activity, your tax report is incomplete.

We regularly see clients who forgot about wallets they used briefly, chains they bridged to once, airdrops they claimed and ignored. Each contains taxable activity visible on-chain.

What Records Do You Need to Keep?

The IRS requires taxpayers to maintain records that substantiate their tax positions. For DeFi, this means:

For every transaction:

• Date and time (note: brokers report in UTC, which can create year-end mismatches)
• Assets involved including token name, symbol, and contract address
• Quantities sent and received
• Fair market value in USD at transaction time
• Wallet addresses for sender and receiver
• Transaction fees (gas) paid
• Transaction type (swap, stake, claim, etc.)

Supporting documentation:

• Exchange account statements
• Wallet transaction histories
• On-chain transaction records (block explorer data)
• Historical price data sources used for FMV calculations

Keep records for at least three years from filing, though the IRS can audit up to six years if substantial underreporting is suspected.

What IRS Forms Do You Need for DeFi?

Understanding which forms to file removes confusion.

Form 8949 and Schedule D

Capital gains and losses go on Form 8949, flowing to Schedule D. Every disposal needs listing: sales, swaps, spending crypto.

Schedule 1

Crypto income from staking, airdrops, and similar sources typically goes on Schedule 1 as "Other Income."

The Digital Asset Question on Form 1040

Form 1040 includes a mandatory question about digital asset activity. The IRS instructions state: "Do not leave the question unanswered. You must answer 'Yes' or 'No.'"

This matters because the IRS has successfully argued in court cases involving foreign accounts that false answers demonstrated willfulness justifying maximum penalties. Expect the same approach with crypto.

How Is DeFi Taxed in the UK?

HMRC treats cryptocurrency as property. The HMRC Cryptoassets Manual provides detailed guidance.

Capital Gains Tax applies to disposals. The annual exempt amount is £3,000 for 2024-25. Rates are 10% (basic rate) or 20% (higher rate) for most assets.

Income Tax applies to staking rewards, lending interest, airdrops, and mining income. These are taxed at your marginal rate.

UK taxpayers report crypto on the Self Assessment tax return. HMRC has been active in requesting data from UK exchanges.

How Is DeFi Taxed in Australia?

The ATO treats crypto as property subject to Capital Gains Tax. The ATO Cryptocurrency guidance is comprehensive.

CGT discount: Assets held over 12 months qualify for a 50% discount on gains.

Income tax: Staking rewards and airdrops are assessable income at fair market value when received.

The ATO has been aggressive on enforcement, running data-matching programs with Australian exchanges. They've sent hundreds of thousands of warning letters to crypto holders with discrepancies.

How Is DeFi Taxed in Canada?

The CRA treats crypto gains as either capital gains (50% taxable) or business income (100% taxable) depending on your activity level and intent. The CRA guidance on cryptocurrency explains the distinction.

Staking rewards and airdrops are generally taxable income. Canada requires reporting in CAD, which adds conversion complexity for multi-currency DeFi activity.

How Is DeFi Taxed in Germany?

Germany offers a significant advantage: crypto held for more than one year is tax-free for individuals under the Spekulationsfrist (speculation period). The German Federal Ministry of Finance issued guidance in 2022.

However, staking and lending can complicate or extend the holding period. If you earn rewards on an asset, the tax-free holding period may extend to 10 years under certain interpretations.

German taxpayers should consult a local Steuerberater familiar with crypto, as the rules are nuanced.

When Do You Need Professional Help?

Tax software handles straightforward portfolios. DeFi breaks that model.

Consider professional help when you have:

High transaction volume. Past a few thousand transactions, software errors compound.

Multi-chain activity. Bridging creates cost basis challenges software handles inconsistently.

Complex DeFi positions. LP tokens, rebasing tokens, liquid staking derivatives, leveraged positions.

Missing historical data. Defunct exchanges, API limits, lost wallet access.

IRS notices. Letters 6173, 6174, or 6174-A require professional response.

We handle the reconciliation, classification, and optimization that software can't do. That includes reconstructing missing data from on-chain records and generating audit-ready reports.

Frequently Asked Questions

Do I owe taxes if I didn't sell crypto for dollars?

Yes. The IRS taxes crypto as property per Notice 2014-21. Receiving crypto from staking or airdrops is income when received. Swapping one crypto for another is a taxable disposal. Converting to fiat is not required to trigger tax.

Is transferring crypto between my own wallets taxable?

No. Moving crypto between wallets you control is not a taxable event. However, you must maintain cost basis records, and the transfer may create tracking complexity under the wallet-by-wallet rules in Rev. Proc. 2024-28.

Can I deduct DeFi losses?

Yes. Capital losses can offset capital gains. If losses exceed gains, you can deduct up to $3,000 against ordinary income per year, carrying forward excess losses. See IRS Topic 409 for details.

What if I can't find my cost basis?

The IRS expects reasonable estimates if exact records are unavailable. Document your methodology. We can often reconstruct cost basis from on-chain data and historical price APIs, which is one of the most common reasons clients come to us.

Will the IRS know about my DeFi activity?

Centralized exchanges report via Form 1099-DA. DeFi protocols don't report (following the April 2025 repeal), but all activity is visible on public blockchains. The IRS contracts with blockchain analytics firms and has issued John Doe summonses to exchanges. Don't assume anonymity.

How do I report thousands of transactions?

You can attach a statement to Form 8949 summarizing transactions, or use tax software that generates IRS-compatible reports. The IRS accepts CSV summaries with required data fields. For complex portfolios, professional preparation ensures accuracy.

Need Help With DeFi Taxes?

DeFi tax reporting isn't just time-consuming—it's technically challenging. If your situation involves high transaction volumes, multi-chain activity, complex DeFi positions, or missing data, book a free consultation with CountDefi. We specialize in exactly these cases.

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