Key takeaways
Yield-generating stablecoins encompass treasury-backed, DeFi, and synthetic models.
US and EU regulations prohibit issuers from paying interest; access is frequently limited.
Rebases and rewards are subject to income tax upon receipt.
Risks persist: regulation, markets, contracts, and liquidity.
The pursuit of passive income has historically led investors towards assets like dividend stocks, real estate, or government bonds.
In 2025, crypto introduces another player: yield-generating stablecoins. These digital assets are designed to maintain their dollar value and generate consistent income while stored in your wallet.
Before diving in, it’s crucial to grasp what these stablecoins are, how the yield is generated, and the applicable legal and tax regulations.
Let’s explore this in detail.
What are yield-bearing stablecoins?
Traditional stablecoins like Tether’s USDt (USDT) or USDC (USDC) are dollar-pegged but do not provide returns for holding. Yield-bearing stablecoins differ: they automatically distribute returns from underlying assets or strategies to token holders.
Today, there are three main models:
Tokenized treasuries and money market funds: These stablecoins are secured by safe assets like short-term US Treasurys or bank deposits. Yields from these holdings are returned to token holders, typically by increasing the token balance or altering its value. Essentially, you can view them as blockchain-encapsulated versions of traditional cash-equivalent funds.
Decentralized finance (DeFi) savings wrappers: Protocols like Sky (formerly MakerDAO) enable users to lock stablecoins, such as Dai (DAI), in a “savings rate” module. When wrapped as tokens like sDAI, your balance increases over time at a rate determined by the protocol’s governance.
Synthetic yield models: Innovative stablecoins, utilizing derivatives strategies, generate yields from crypto market funding rates or staking rewards. Returns can be higher but may fluctuate with market conditions.
Can you earn passive income with yield-bearing stablecoins?
The brief answer is yes, though specifics can differ by product. Here’s a typical process:
1. Choose your stablecoin type
For lower risk and traditional backing, opt for tokenized treasury-backed coins or money-market fund tokens.
If comfortable with DeFi risk, consider sDAI or similar savings wrappers.
For higher potential yield (with increased volatility), synthetic stablecoins like sUSDe may be suitable.
2. Buy or mint the stablecoin
Most tokens can be purchased on centralized exchanges — subject to Know Your Customer (KYC) requirements — or directly through a protocol’s website.
However, some issuers limit access based on geography. For instance, many US retail users can’t acquire tokenized treasury coins due to securities laws (as they are regarded as securities and limited to qualified or offshore investors).
Minting stablecoins is often restricted. To mint, you deposit dollars with the issuer, who then creates new stablecoins. However, this option may not be available to all; many issuers constrain minting to banks, payment firms, or qualified investors.
For example, Circle (the issuer of USDC) only permits approved institutional partners to mint directly. Retail users cannot send dollars to Circle; they must purchase USDC that is already circulating.
3. Hold or stake in your wallet
After purchasing, merely holding these stablecoins in your wallet might suffice to earn yield. Some use rebasing (where your balance increases daily), while others utilize wrapped tokens that appreciate over time.
4. Use in DeFi for extra earnings
Alongside the inherent yield, some holders leverage these tokens in lending protocols, liquidity pools, or structured vaults to generate additional income streams. This introduces more complexity and risk, so proceed with caution.
5. Track and record your income
Even if the tokens increase automatically, tax regulations in most countries classify those increases as taxable income upon crediting. Maintain accurate records of when and how much yield you received.
Did you know? Certain yield-bearing stablecoins distribute returns via token appreciation instead of issuing extra tokens, resulting in a consistent balance, with each token becoming redeemable for a larger underlying asset value over time. This nuance can impact tax calculations in certain regions.
Examples of yield-bearing stablecoins
Not every asset that appears to be a yield-bearing stablecoin is indeed one. Some are genuine stablecoins, while others are synthetic dollars or tokenized securities. Here’s a breakdown:
True yield-bearing stablecoins
These are pegged to the US dollar, supported by reserves, and meant to provide yield.
USDY (Ondo Finance): A tokenized note secured by short-term treasuries and bank deposits, available only to non-US users after full KYC and Anti-Money Laundering (AML) compliance. Transfers into or within the US are prohibited. USDY functions like a rebasing instrument that mirrors Treasury yields.
sDAI (Sky): sDAI is a wrapper around DAI deposited in the Dai Savings Rate. Your balance increases at a variable rate established by Maker governance. It’s widely utilized in DeFi but depends on smart contracts and protocol decisions — not insured deposits.
Synthetic stablecoins
These imitate stablecoins but utilize derivatives or alternative mechanisms rather than direct reserves.
sUSDe (Ethena): A “synthetic dollar” stabilized by long spot crypto coupled with short perpetual futures. Holders of sUSDe receive returns from funding rates and staking rewards. Returns may decrease swiftly, and risks include market fluctuations and exchange exposure.
Tokenized cash equivalents
These are not stablecoins but are frequently employed in DeFi as “onchain cash.”
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 limited to qualified investors and institutions, rendering them popular with DeFi protocols but generally inaccessible to retail users.
The 2025 stablecoin rulebook you should know
Regulation is now essential in determining your ability to hold specific yield-bearing stablecoins.
United States (GENIUS Act)
In 2025, the US enacted the GENIUS Act, its initial federal stablecoin legislation. A significant detail is the prohibition on issuers of payment stablecoins from paying interest or yield directly to holders.
This means tokens like USDC or PayPal USD (PYUSD) cannot offer rewards simply for holding them.
The aim is to prevent stablecoins from competing with banks or being classified as unregistered securities.
Consequently, US retail investors cannot legally receive passive yield from mainstream stablecoins. Any yield-bearing varieties are generally structured as securities and limited to qualified investors or marketed offshore to non-US users.
European Union (MiCA)
Under the Markets in Crypto-Assets (MiCA) framework, issuers of e-money tokens (EMTs) are also barred from paying interest. The EU categorizes stablecoins strictly as digital payment instruments, not as savings options.
United Kingdom (ongoing rules)
The UK is in the process of finalizing its own stablecoin regulations, emphasizing issuance and custody. While it’s not yet an explicit ban, the policy trajectory aligns with that of the US and EU: Stablecoins should focus on payments, not yield.
The clear takeaway: Always verify if you’re permitted to buy and hold a yield-bearing stablecoin as per your location.
Tax considerations for yield-bearing stablecoins
Tax implications are as critical as selecting the right coin.
In the US, staking-style rewards, including rebases, are taxed as ordinary income when received, irrespective of whether they are sold. Disposing of those tokens at a different value later triggers capital gains tax. Additionally, 2025 introduced new reporting requirements that mandate crypto exchanges to issue Form 1099-DA, compelling taxpayers to track cost basis per wallet, making precise record-keeping increasingly vital.
In the EU and globally, fresh reporting regulations (DAC8, CARF) mean crypto platforms will automatically report your transactions to tax authorities starting in 2026.
In the UK, HMRC guidelines categorize many DeFi returns as income, and disposals of tokens are also subjected to capital gains tax.
Risks to keep in mind if you are considering yield on your stablecoins
Despite the appeal of yield-bearing stablecoins, they aren’t without risks:
Regulatory risk: Laws can evolve swiftly, potentially restricting access or terminating products.
Market risk: For synthetic models, yield relies on the volatile crypto markets and may vanish abruptly.
Operational risk: Smart contracts, custody arrangements, and governance choices can influence your assets.
Liquidity risk: Some stablecoins impose redemption restrictions on certain investors or enforce lock-up conditions.
Thus, while seeking yield on stablecoins can be profitable, it’s not equivalent to depositing cash in a bank account. Each model, whether Treasury-backed, DeFi-native, or synthetic, has its unique trade-offs.
A prudent approach involves carefully sizing positions, diversifying across issuers and strategies, and consistently monitoring regulations and redemption options. The optimal strategy is to treat stablecoin yields as an investment product, not as risk-free savings.
This article does not provide investment advice or recommendations. Every investment and trading move carries risks, and readers should conduct their own research when making decisions.
