6 Ways to Earn Crypto Passive Income

Want to know how to earn passive income from crypto? There are plenty of ways from staking to yield farming to liquidity provision. Learn more in our guide on how to make money from crypto.

Can you earn passive income with crypto?

Yes, you can earn passive income with crypto!

In fact, many crypto interest-bearing platforms offer far higher returns than traditional investments.

How to earn passive income from crypto

There are plenty of options when it comes to earning crypto passive income, so to help you get started, we’ve rounded up the 7 most common ways, including:

1. PoS staking

2. Crypto vaults

3. Liquidity provision

4. Lending crypto

5. Yield farming

6. Dividend-earning tokens

PoS staking

Staking is one of the most popular ways to earn passive income from idle crypto assets you’re holding, and there are plenty of staking cryptos to pick from.

In brief, crypto staking involves investors pledging their crypto to help validate transactions on a given blockchain as part of the blockchain’s consensus mechanism.

While running a validator node is a bit more technical, with most blockchains, there are simpler options for staking your crypto, including staking through a centralized exchange and delegating your crypto to stake using a non-custodial wallet.

Once you’ve staked your crypto, you’ll start earning passive income from your crypto straight away. Rewards vary depending on the blockchain, but APY can be in the higher double digits, depending on the blockchain and crypto staking platform.

Crypto vaults

Crypto vaults essentially work like crypto savings accounts, except in most instances, the interest rates offered are far higher than you’d find with savings accounts from traditional financial providers like banks, making them a popular option for earning passive income from crypto.

However, you should always DYOR when choosing a crypto interest-bearing platform or vault and remember that if it sounds too good to be true (like insanely high yields), then it probably is.

Liquidity provision

Liquidity providers provide a vital function for dApps, as without them, there would be no crypto for investors to trade or otherwise transact with on the platform. And they’re rewarded for their service with a percentage of the fees, as well as sometimes other tokens, like governance tokens. This is also sometimes known as liquidity mining, but it’s one of the most popular ways to earn passive income from crypto in the decentralized space.

It’s easy to become a liquidity provider for decentralized exchanges and other decentralized platforms. All you need to do is have a non-custodial wallet, go to the app you’d like to provide liquidity for, find the pool you want to provide liquidity for, and connect your wallet. You’ll generally need to provide two tokens for a given pool, for example, USDT & ETH.

A word of warning on liquidity provision, though, there is a unique risk that comes in the form of impermanent loss. It’s effectively an opportunity cost, but it’s still well worth being aware of before you dive in.

Crypto lending

Just like banks earn interest on loans, you can too in the cryptoverse, and there are plenty of crypto lending platforms to pick from, both centralized and decentralized.

For centralized lending platforms, you’ll find most lending products in the ‘earn’ sections, and they may even cross over with the vaults we’ve mentioned already, as lending is one of the most common ways to earn interest on your crypto.

Lending is also a popular way to earn passive income from crypto in the decentralized market. Much like with the liquidity provision platforms we mentioned above, decentralized crypto lending platforms usually work by depositing your capital into a given pool or protocol, after which, you’ll generally receive tokens representing your capital. Many of these platforms, including Compound Finance, also reward investors with additional tokens.

Yield farming

Yield farming refers to the composability of dApps, which is a bit of a mouthful, so let’s break it down with an example.

You want to earn passive income from your crypto, so you stake your ETH on the liquid staking platform, Lido. When you stake your ETH with Lido, you receive stETH tokens (a kind of token representing your staked ETH in the pool) in return.

You’ll accrue staking rewards already, but you want even more. So you head over to Curve Finance, a decentralized automated market maker. You can add your stETH to the pool to provide liquidity here, allowing you to earn even more income from one asset.

In fact, if you provide liquidity to certain pools on Curve, you’ll be additionally rewarded with CRV tokens, which you could then go on to stake for rewards in Convex Finance and other platforms. It’s this interoperability that allows DeFi investors to earn compound interest and extremely high yields.

Dividend-earning tokens

Just like a company may distribute profits to shareholders in dividends, some specific cryptocurrencies work similarly, allowing you to earn passive income just by holding a particular cryptocurrency.

In most instances, these dividends represent a share of trading fees or profits on a given platform, although the method of paying out rewards varies. For example, AscendEX has the ASD token, and ASD holders earn dividends through automatic airdrops. Meanwhile, KuCoin has the KCS token and KCS holders are paid daily dividends in KCS, based on 50% oil of the fees from users on KuCoin.

How to pick a platform

You need to be careful when choosing a platform to lock up your crypto with to earn passive income. Each platform has its own pros and cons. You should consider:

• Centralized or decentralized: There are centralized and decentralized options available to earn passive income from your crypto, both with unique benefits and risks. With centralized platforms, you no longer hold custody of your crypto, meaning if the platform collapses, your crypto may go with it. Whereas with decentralized platforms, you retain custody (or a token representing your capital) of your crypto. This said, decentralized platforms are more prone to hacks, rug pulls, and other risks, whereas centralized platforms often offer principal-protected investments.

• Reputation and trustworthiness: Reputation matters in crypto. You should always thoroughly research any platform or protocol you’re using before investing to make sure you understand the risks involved, how the platform or protocol is perceived by the wider community, and more.

• Strong knowledge of protocol and risks: Yield farming, liquidity provision, and decentralized lending sound great, but a lot of these protocols aren’t made for beginners. You need to have a firm understanding of how the protocol works, so you can safely move your capital in and out as you wish.

• Principal-protected investments: Some centralized platforms offer what’s known as principal-protected investments. This means that regardless of what happens in the market, you’ll receive the same number of tokens that you deposited, as well as the minimum yield determined. In a volatile market, this can be extremely appealing to investors.

Is passive income from crypto taxable?

While tax offices like the IRS haven’t yet released guidance on a huge number of crypto investments, including many of those mentioned in this guide, they are clear that crypto income is generally taxable, and the specific tax depends on how you’re seen to be earning.

If you’re earning new tokens, like from staking, this is generally seen as additional income and subject to income tax on receipt based on the fair market value of your tokens in your fiat currency at the point you received them.

Meanwhile, if you’re trading tokens, like with liquidity provision, lending, or yield farming, this may be seen as a crypto-to-crypto trade and, in most instances, any gain from a trade is subject to capital gains tax.

You can use a crypto tax calculator to help you easily calculate your tax liability.