In a previous article, I explained how to obtain a higher interest rate when using your money to make money. I would like to complete the picture with two related topics: taxes and what are the ways that DeFi offers to make money.

Taxes

I am not a tax person. Do not base your behavior on my writing. Tax is a serious thing.

When you place your money in a regular US savings account, the bank will generate a 1099-INT form for you. This document helps you report to the Internal Revenue Service (IRS) on this specific form of income.

When you use Gemini Earn, Gemini will not generate a 1099-INT form for you, they'll generate a 1099-MISC, only if you've earned more than $600.

I do not know how this will be taxed - and a quick Google informs me that many people don't know either. So I've asked Gemini. And I've asked a tax accountant. Stay tuned, as they say. But, just to be on the safe side, I'd prepare for this to be taxed as such:

1. The extra GUSD you will earn as rewards for lending could be taxed as income
2. Upon withdrawing your GUSD and turning it into USD, the new amount could be taxed as capital gain, either short-term if you've held GUSD for less than a year or long-term

What frustrates me with the above is that it looks and feels like double taxation. Still better than 1%. If you know, from experience, how this gets taxed, let me know and I'll inform the rest of the audience.

How does DeFi make money?

The best resource I have found so far is a very clear and insightful article by Nat Eliason. I recommend you read it. For the reasonable non-stratospheric rates, here is the gist: