A DeFi lending deposit is crypto supplied to a lending protocol such as Aave or Compound, where it joins a pool that borrowers draw from. In return you earn interest and usually receive a token recording your deposit and the interest accruing on it.
There is no counterparty in the usual sense. You supply an asset to a pool, borrowers take from that same pool against collateral they have posted, and an interest rate set by utilisation moves between the two sides. Everything runs through the contract.
Most protocols issue a receipt token. Aave issues aTokens, which rebase so your balance grows as interest accrues. Compound issues cTokens, which keep the balance fixed and rise in value against the underlying asset. Both record the same thing in different ways, and both are transferable, so they can be sold or used elsewhere. In that respect they behave much like LP tokens.
Deposits are usually withdrawable on demand, subject to the pool having liquidity available. Posting collateral in order to borrow against it is a related but separate transaction, with liquidation risk attached.
There is no IRS guidance on DeFi lending deposits, so the treatment gets argued from general principles.
The reading that it is not taxable treats the deposit as a loan of your asset. You keep the economic exposure, you can withdraw the same asset, and the receipt token records the position rather than replacing it. Nothing has been sold.
The reading that it is taxable applies section 1001 to the receipt token. You gave up one asset and received another, with a different contract address and different rights, which is an exchange of property.
Section 1058 provides a safe harbour for securities lending that avoids exactly this problem, but it applies to securities. Crypto is treated as property under Notice 2014-21, and no equivalent safe harbour has been extended to it, so the analogy is a starting point for the argument rather than authority you can rely on.
The interest earned is a separate question with a clearer answer, covered under DeFi lending interest.
Receipt tokens are where these deposits go wrong. An aToken or cToken arriving in a wallet often has no price data behind it, so it imports at zero and the deposit looks like a disposal of the full amount into nothing. Compound style tokens make it worse, because the interest is held inside the token's redemption value and never appears as an income line at all. It surfaces later as an unexplained gain on the withdrawal, taxed as capital rather than income.
Read our 2026 Guide to DeFi Taxes
CountDeFi specializes in complex DeFi tax accounting, including lending protocols, liquid staking tokens and multi-chain activity. See pricing.
