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.

I thought a lot about this myself. The original answer is correct, your taxed ordinary income based on the fair market value when the interest payment is received, then taxed again when the lot is disposed.

Personally, I decided to have interest payed out in stablecoin, set aside a percentage for taxes, then use the rest to buy more crypto.

Yes, the value is set at the time it is received. So yes if BTC halves in value you might feel you got a bad deal, but as you say it might double too. Whether you convert earnings to fiat depends on your appetite for risk.

Another point for discussion is that is the interest declared as income or Interest? I personally am declared my interest from blockfi as interest (you therefore have £500 or £1000 tax free). This is a gray area with no clear guidance from HMRC.

Sounds like interest to me. They certainly call it interest on their web site. I see that Gemini is their custodian, so should be relatively safe. However, not the same protections as investing in fiat with a bank, higher interest, more risks.

Yes indeed @forest. What bank gives 6% interest these days! :slight_smile:

regarding taking profits on interest and declaring CGT - Am i right in thinking that if I were to receive interest from Blockfi on 1st of a month and covert straight into Fiat this doesn’t affect my long term hodlings in terms of impacting CGT? An example would be when BTC is worth £100k each but my DCA was <10k selling my interest for passive income wouldn’t affect the CGT on the DCA <10k?
Hope this makes sense.

That’s a good question! I don’t know what the cost basis would be for the crypto interest you sold. It might vary by tax jurisdiction too. Let us know if you find an answer.

I’m UK based.
The cost basis for the interest is based on the cost of the asset on the day that you received it. It’s more about the deposing of the asset the same day as you receive (I assume it’s the same as acquiring within 30 days):