Introduction

Cryptocurrency yields—from staking rewards to complex decentralized finance (DeFi) lending—have exploded over the last several years. As digital assets become mainstream investable vehicles, the tax environment around DeFi yields has created persistent headaches for CPA firms, particularly those with lean teams and high client demand.

The reality of 2025 is clear: missing forms, ambiguous income characterizations, and evolving regulations have made accurate reporting both more urgent and more frustrating than ever.

This blog provides current, workflow-optimized answers for CPA leaders confronting the documentation and classification gaps introduced by DeFi yields, helping minimize audit risk and enhance efficiency as deadlines loom.

DeFi Yield Activities: Where Reporting Breaks Down

DeFi protocols fundamentally differ from traditional brokerages: transactions occur directly between participants, facilitated by smart contracts, without any regulated intermediary. This results in few, if any, year-end summaries or IRS Forms 1099 being issued for staking, lending, liquidity pool participation, or DAO activities.

Centralized platforms—including the leading exchanges—are now ramping up reporting on Form 1099-DA for sales and income generated during 2025, with filings set to begin in early 2026.
Decentralized platforms, however, are not required to begin similar reporting until 2027, leaving a two-year gap where clients’ DeFi yields may go completely undocumented unless the CPA actively investigates.

Three Core Reporting Gaps

1. Missing 1099s

Without directly issued tax forms, many clients mistakenly assume “no form equals no tax.” This leads to underreporting and paves the way for IRS scrutiny or state audits.

2. Unclear K-1 Treatments

Decentralized autonomous organizations (DAOs) and liquidity pools can resemble partnerships, but almost never issue K-1s. CPA firms must decide on a reasonable approach for allocating and reporting such income without formal documentation.

3. Unclassified Income

DeFi activities pay rewards that do not always fall into well-defined categories such as interest, dividend, royalty, or partnership income. Unclassified digital-asset income may be subject to different rates or reporting schedules depending on its nature, creating workflow ambiguity and excessive review time.

Impact on Small CPA Firms

Smaller firms, without dedicated crypto teams, are hit hardest. They bear the brunt of incomplete client records and ambiguous transactions—especially when IRS rules keep changing and technology outpaces regulatory clarity.

In 2025, regulatory risk around cryptocurrency income is rapidly intensifying as states like California and New York increase audit activity targeting digital asset underreporting.

The result?

• Last-minute document requests

• Difficult client conversations about missing records

• Elevated review budgets

• Significant exposure to compliance risk

DeFi Activity: IRS Tax Treatments in Practice

While regulatory guidance remains fluid, current best practice recommends the following categorization for common DeFi transactions. These mappings ensure accurate reporting and reduce audit exposure.

DeFi Yield Tax Treatment Reference

Note: These reference points offer a practical starting line, but each client’s facts must guide actual reporting. Income can shift between Schedules C, E, and D based on whether activities rise to the level of a trade or business or remain passive investments.

Identifying DeFi Transactions: Client and Firm Workflows

The workflow for DeFi tax preparation begins with transaction identification—a secured wallet export is now the equivalent of a bank statement for crypto clients. Accurate reporting depends on gathering complete histories for all wallet addresses and protocols used.

Recommended Transaction Discovery Process

• Request Comprehensive Data → Secure full CSV exports or live blockchain explorer links for every wallet. No screenshots. Incomplete histories mean lost deductions or unreported income.

• Tag Transactions → Utilize platforms like Etherscan, Zerion, and DeBank to flag staking, lending, governance token receipts, claims, and harvest transactions.

• Organize for Audit Defense → Save tagged transaction logs for all clients. Frequent token inflows, yield farming, and liquidity withdrawals should be flagged for review.

Intake Checklist That Works

• Aggregate all wallet and exchange addresses used throughout the year

• Export complete annual transaction logs

• Summarize the DeFi platforms engaged

• Report year-end balances for all assets

• Gather any 1099, K-1, or platform-generated summaries

• Require all data submissions in CSV, not screenshots

Enforcing this checklist with mid-February deadlines can reduce missing records by 30% for firms that implement it.

Classification Efficiency: Streamlining Workpapers

Classification—not just detection—is the true challenge for CPA firms working with crypto yield. Every new transaction flow may belong on a different IRS schedule, yet most DeFi protocols do not label rewards or payments for tax purposes.

Workflow Optimizations for Classification

• Default Mapping → Assign staking to other income, lending to interest, pool fees to Schedule C, and swaps to Form 8949.

• Batch Processing → Aggregate repeated, identical rewards for faster reporting.

• Memo Templates → Use standardized descriptions like:
  2025-03-15 ABC Token Staking Reward

• Automated Import Tools → Convert wallet CSVs into tax-ready formats using Koinly, CoinTracker, or CryptoTaxCalculator.

Automation: Reducing Error and Reconciliation Time

Manual reconciliation—matching hundreds of DeFi transactions across wallets, exchanges, and protocols—is inefficient and error-prone.

Best Practices

• Use automation tools to bulk-import transaction data

• Automate income categorization and taxable event detection

• Export audit-ready workpapers and basis summaries

• Leverage API integrations for seamless, secure reporting

Client Intake Bottlenecks: Address and Resolve Early

For CPA leaders, client onboarding remains the biggest barrier to streamlined crypto tax work.

Strategies

• Use specialized checklists

• Set strict intake deadlines

• Require CSV exports, not screenshots

• Centralize uploads in a secure portal

Firms enforcing these rules consistently see faster turnaround times and fewer last-minute emergencies.

Regulatory Changes: What’s New for 2025

• The IRS now treats staking and lending rewards as ordinary income upon receipt

• Token swaps and airdrops trigger immediate taxable events

• Form 1099-DA starts in 2026 for centralized exchanges

• State-level audits, especially in CA and NY, are increasing

CPA firms must update organizers, train staff, and improve client communication to stay ahead.

Educating Clients: The Preventive Payoff

CPA firms that educate clients experience smoother tax seasons.

• Provide DeFi tax guides

• Host Q&A webinars

• Automate reminders and deadlines

Firms requiring crypto data by Feb 15 saw a 30% drop in missing records and avoided most peak-season disasters.

Frequently Asked Questions

Are DeFi yields taxable if there’s no 1099?

Yes. Staking and lending rewards are taxable upon receipt, regardless of 1099 issuance.

Do all DeFi yields go on Schedule C?

No. Placement depends on whether the activity is a business or a passive investment.

What if a client can’t provide a full transaction history?

Prepare a best-effort return, disclose limitations, and coach clients for better compliance in future seasons.

Practical Advice for Firm Leaders

DeFi yields are here to stay. Missing 1099s, absent K-1s, and unclassified income will remain challenges well into 2027.

Firms should:

• Invest in technology-driven workflows

• Automate classification & reconciliation

• Prioritize client education

• Treat crypto tax work as a strategic opportunity

Conclusion

2025 is a pivotal year for crypto tax reporting. CPA firms that embrace technology, process optimization, and client education will lead the way.

A proactive, workflow-driven approach turns DeFi reporting chaos into efficiency and competitive advantage.