Main Insights
Yield-generating stablecoins encompass treasury-backed, DeFi, and synthetic varieties.
Laws in the US and EU prohibit interest payments by issuers; access is frequently limited.
Rebases and rewards are treated as taxable income upon receipt.
Ongoing risks exist: including regulation, market fluctuations, contracts, and liquidity challenges.
The quest for passive income consistently leads investors towards assets like dividend stocks, real estate, or government bonds.
In 2025, cryptocurrency introduces a new option: yield-generating stablecoins. These digital assets aim not only to maintain parity with the dollar but also to provide a consistent income while residing in your wallet.
However, before jumping in, it’s crucial to grasp what these stablecoins entail, how the yield is generated, and the associated legal and tax implications.
Let’s break down the details.
What are yield-generating stablecoins?
Traditional stablecoins like Tether’s USDt (USDT) or USDC (USDC) are pegged to the dollar but do not offer rewards for holding them. Yield-generating stablecoins differ: they automatically distribute returns from underlying assets or strategies to token holders.
Currently, three primary models are in use:
Tokenized treasuries and money market funds: These stablecoins are collateralized by secure assets such as short-term US Treasuries or bank deposits. The yield generated from these assets is returned to token holders, typically by increasing their token balance or adjusting its value. In essence, you can view them as blockchain-wrapped traditional cash-equivalent funds.
Decentralized finance (DeFi) savings wrappers: Protocols like Sky (previously MakerDAO) enable users to lock stablecoins, such as Dai (DAI), within a “savings rate” module. When wrapped into tokens like sDAI, your balance appreciates over time at a rate determined by the protocol’s governance.
Synthetic yield models: Certain innovative stablecoins, driven by derivatives strategies, generate yield from crypto market funding rates or staking rewards. While returns can be more substantial, they also vary based on market conditions.
Can you earn passive income with yield-generating stablecoins?
The succinct answer is yes, though specifics may differ by product. Here’s a standard path:
1. Select your stablecoin type
If you prefer lower risk with conventional backing, consider tokenized treasury-backed coins or money market fund tokens.
If you’re comfortable with DeFi risks, think about sDAI or comparable savings wrappers.
For potentially higher returns (with greater volatility), synthetic stablecoins like sUSDe may be appropriate.
2. Acquire or mint the stablecoin
Most of these tokens are obtainable through centralized exchanges—subject to Know Your Customer (KYC) requirements—or directly via a protocol’s website.
Nevertheless, certain issuers limit access based on geography. For instance, many US retail clients are unable to purchase tokenized treasury coins due to securities regulations (as they are deemed securities and restricted to qualified or offshore investors).
Additionally, stablecoin minting typically has restrictions. To mint, you provide dollars to the issuer, who subsequently creates new stablecoins. However, this option is often limited; many issuers permit minting only for banks, payment firms, or qualified investors.
For instance, Circle (the issuer of USDC) permits only approved institutional partners to mint directly. Retail users must acquire USDC already in circulation.
3. Hold or stake in your wallet
Once acquired, merely holding these stablecoins in your wallet might suffice to earn yield. Some employ rebasing (your balance increases daily), while others utilize wrapped tokens that appreciate over time.
4. Engage in DeFi for extra earnings
Beyond the inherent yield, certain holders employ these tokens in lending protocols, liquidity pools, or structured vaults to create additional income streams. This adds complexity and risk, so caution is advised.
5. Monitor and document your income
Even as tokens accumulate automatically, tax regulations in many countries categorize those increments as taxable income once credited. Maintain meticulous records of when and how much yield you obtain.
Fun fact: Some yield-generating stablecoins distribute returns via token appreciation rather than extra tokens, resulting in your balance remaining constant while each token becomes redeemable for greater underlying assets over time. This nuance can influence tax calculations in certain jurisdictions.
Examples of yield-generating stablecoins
Not all products resembling yield-generating stablecoins genuinely qualify. Some may be conventional stablecoins, others synthetic dollars, and some may be tokenized securities. Let’s clarify the distinctions:
True yield-generating stablecoins
These are pegged to the US dollar, supported by reserves, and designed to yield returns.
USDY (Ondo Finance): A tokenized note backed by short-term treasuries and bank deposits, available exclusively to non-US users who complete full KYC and Anti-Money Laundering (AML) checks. Transfers into or within the US are prohibited. USDY functions like a rebasing tool reflecting Treasury yields.
sDAI (Sky): sDAI is a wrapper around DAI locked in the Dai Savings Rate. Your balance appreciates at a variable rate set by Maker governance. It’s widely incorporated in DeFi but relies on smart contracts and protocol decisions—not insured deposits.
Synthetic stablecoins
These imitate stablecoins but rely on derivatives or alternative mechanisms rather than direct reserves.
sUSDe (Ethena): A “synthetic dollar” stabilized by long spot crypto and short perpetual futures. Holders of sUSDe earn returns from funding rates and staking rewards. Returns can diminish rapidly, and risks encompass market volatility and exchange exposure.
Tokenized cash alternatives
These are not stablecoins but frequently serve as “on-chain cash” in DeFi.
Tokenized money market funds (e.g., BlackRock’s BUIDL): Not strictly a stablecoin but tokenized shares in money market funds. They distribute dividends monthly in the form of new tokens. Access is restricted to qualified investors and institutions, making them attractive for DeFi protocols but generally unavailable for retail users.
The 2025 stablecoin regulatory framework you should understand
Regulation is pivotal regarding your ability to hold certain yield-generating stablecoins.
United States (GENIUS Act)
In 2025, the US enacted the GENIUS Act, its initial federal stablecoin legislation. A key provision is the prohibition of payment stablecoin issuers from paying interest or yield directly to holders.
This implies tokens like USDC or PayPal USD (PYUSD) cannot reward you merely for holding them.
The intention is to prevent stablecoins from competing with banks or becoming unregistered securities.
Consequently, US retail investors are legally barred from receiving passive yield from mainstream stablecoins. Any yield-generating versions are generally set up as securities and restricted to qualified investors or offered offshore to non-US individuals.
European Union (MiCA)
Under the Markets in Crypto-Assets (MiCA) structure, issuers of e-money tokens (EMTs) are similarly banned from distributing interest. The EU categorizes stablecoins strictly as digital payment instruments, not as vehicles for savings.
United Kingdom (pending regulations)
The UK is finalizing its own stablecoin regulations, emphasizing issuance and custody. While not yet a definitive ban, the policy direction aligns with the US and EU: Stablecoins should function primarily for payments, not yield accumulation.
The clear takeaway: Always verify whether it is legal for you to buy and hold a yield-generating stablecoin in your locality.
Tax implications for yield-generating stablecoins
Tax treatment is as crucial as choosing the appropriate coin.
In the US, staking-based rewards, including rebases, are taxed as ordinary income upon receipt, regardless of whether they are liquidated. Should you later sell those tokens at a different value, this invokes capital gains tax. In addition, 2025 has introduced new reporting requirements mandating crypto exchanges to issue Form 1099-DA, with taxpayers needing to track cost basis per wallet, placing a premium on accurate record-keeping.
In the EU and internationally, updated reporting regulations (DAC8, CARF) will mean crypto platforms automatically relay your transactions to tax authorities starting in 2026.
In the UK, HMRC guidance categorizes many DeFi returns as income, with token disposals also subject to capital gains tax.
Risks to consider if contemplating yield on your stablecoins
While yield-generating stablecoins appear appealing, they are not without risks:
Regulatory risk: Regulations can evolve rapidly, potentially restricting access or terminating products.
Market risk: In synthetic models, yield is contingent upon the volatile crypto market, which can vanish quickly.
Operational risk: Smart contracts, custody agreements, and governance choices can all influence your investments.
Liquidity risk: Certain stablecoins impose restrictions on redemptions for specific investors or implement lock-up periods.
The wisest strategy is to cautiously size positions, diversify across issuers and strategies, and remain vigilant regarding regulations and redemption options. It’s best to treat stablecoin yields as investment products, rather than risk-free savings.
This article does not offer investment advice or endorsements. All investments and trading decisions come with risks, and readers should perform their own research prior to making choices.
