Income tax calculation when interest earned in crypto

In Defi, you can earn interest on deposited coins.

For instance (numbers for illustration only), if I have 1 BTC earning 5% APY and the interest BTC is deposited every day or every week.
Is the value from the earned BTC to USD or GBP done on the day it is received? Is the income tax based on this value ?

For instance:

  • all the earned BTCs are converted to fiat at the end of the year,
  • the value of the BTC has halved.

Does it mean I would have to pay the income tax based on when the price of BTC was twice higher, which then make the operation not profitable as I’d pay in USD/GBP twice the value of what it would normally correspond when I get it back in USD/GBP? Obviously, if BTC increases, then that’s the other way around.

Is it better then to convert the earned BTC to USD/GBP when it’s received?

Thank you

Koinly will calculate the income as the fair market value of the received Bitcoin on the date you received it. Whether you should sell it or keep it is a trading decision and it can certainly impact the amount of tax you may end up paying.