Disclaimer: We are not licensed tax experts. This is for informational purposes only. You should consult your own tax advisors before making any investments.
Just like a traditional savings account, any interest earned from a high yield crypto earning account is considered taxable income by the IRS and must be reported on your tax return. Interest from all savings accounts is taxed at your earned income tax rate for the year. For example, if your effective tax rate is 22%, you will pay 22% in taxes on the interest you earn on your crypto earning account. Your financial or investment institution will send you a tax form early in the new year stating the interest earned.
To be clear, you’re never taxed on your contributions to your accounts, only on your earnings. For most taxpayers, interest earned from a high-yield crypto account isn’t enough to significantly increase your tax liability, unless you deposited a large amount into the account. Therefore the benefit of keeping your funds earning high interest in a crypto earning account usually outweighs any minor bump in taxes.With all this being said, if you are using retirement funds for your investment, you may be able to earn interest tax free. Check out our video What is a Self-Directed IRA to learn more.