DeFi lending interest is the return you earn for supplying crypto to a lending protocol. Borrowers pay it through the contract, and it reaches you either as a growing token balance or as a rising redemption value on the token recording your deposit.
Rates move with utilisation. The more of a pool that is borrowed, the higher the rate paid to suppliers, and it updates block by block rather than on a schedule.
Delivery differs by protocol, and that is what determines when the income becomes visible. Rebasing receipt tokens such as Aave's aTokens increase your balance continuously, so the interest shows up as more tokens. Redemption-value tokens such as Compound's cTokens hold the balance still and grow in value, so the interest shows up only when you withdraw.
Some protocols pay a second stream on top, in their own governance token, as an incentive to supply. That is closer to liquidity mining rewards than to interest, and it gets analysed separately.
As ordinary income, at the fair market value of what you receive when you gain control of it.
The IRS has not published guidance specific to DeFi lending, but the position is less contested than the deposit itself. Section 61 brings income into gross income from whatever source derived, and names interest among the examples. Revenue Ruling 2023-14 applies a dominion and control test to staking rewards, and the same reasoning gets applied here.
Rebasing tokens produce income as the balance grows. Redemption-value tokens are harder, because nothing arrives until you withdraw and the accrued interest sits inside the token. One reading recognises income as the redemption value rises, another on withdrawal. The same timing question arises with liquid staking tokens. Whichever position is applied, the amount recognised as income becomes the cost basis of those tokens, and selling them later is a separate capital gain or loss.
Interest is ordinary income at your marginal rate. It does not receive long-term capital gains treatment however long the deposit is held.
Continuous accrual is the recurring problem. Interest arriving block by block cannot be reported line by line, so a defensible recognition point has to be chosen and documented. Reports we review regularly show none of it: the deposit is recorded, the withdrawal is recorded as a larger amount, and the difference lands as a capital gain when it should have been ordinary income. That understates the tax in the year it was earned and misstates the character of the rest.
Read our 2026 Guide to DeFi Taxes
CountDeFi specializes in complex DeFi tax accounting, including lending protocols, rebasing tokens and multi-chain activity. See pricing.
