Beyond basic stablecoins: your 2025 playbook for earning passive crypto income

Many investors are drawn to different types of assets in their search for passive income, such as dividend stocks, property and government bonds. In 2025, the world of crypto will offer another interesting option: stablecoins that generate income. These digital tokens are designed not just to keep their value the same as the dollar, but also to generate a steady income simply by sitting in your wallet. But before you invest, it’s important to understand how these assets work, what the legal rules are, and the tax implications. This is because they’re more complicated than traditional savings.

What exactly are yield-bearing stablecoins?

Unlike conventional stablecoins such as Tether’s USDt or USDC, which offer no direct return for holding them, yield-bearing stablecoins are engineered to automatically pass on returns from underlying assets or investment strategies to their token holders. This unique feature places them in a distinct category within the stablecoin ecosystem.

Today, three primary models are prevalent:

1. Tokenized treasuries and money market funds: These stablecoins derive their yield from highly secure, traditional assets like short-term US Treasuries or bank deposits. The income generated from these holdings is then distributed back to token holders, often by incrementally increasing their token balance or adjusting the token’s underlying value. One could view them as blockchain-wrapped versions of traditional cash-equivalent funds, bringing the reliability of established financial instruments to the digital ledger.
2. Decentralized finance (DeFi) savings wrappers: Protocols like Sky (formerly MakerDAO) enable users to lock stablecoins, such as Dai, into a specialized “savings rate” module. When these locked assets are wrapped into tokens like sDAI, your balance grows progressively over time at a rate determined by the protocol’s governance. This model harnesses the power of DeFi to generate yield from within the crypto ecosystem itself.
3. Synthetic yield models: Representing a more innovative approach, some stablecoins generate yield through sophisticated derivatives strategies, leveraging crypto market funding rates or staking rewards. While these can offer higher potential returns, their yield often fluctuates significantly, directly correlating with prevailing market conditions and inherent volatility.

Navigating the path to passive income with yield-bearing stablecoins

Earning passive income through these stablecoins is indeed possible, though the specific process can vary depending on the product chosen. Here’s a typical journey:

1. Choosing your stablecoin type: Your selection should align with your risk tolerance. For those seeking lower risk and traditional backing, tokenized treasury-backed coins or money-market fund tokens are generally preferred. If you’re comfortable with the inherent risks of DeFi, sDAI or similar savings wrappers might be suitable. For the potential of higher, albeit more volatile, returns, synthetic stablecoins like sUSDe could be an option.
   
2. Acquiring the stablecoin: These tokens are typically available through centralized exchanges, which usually necessitate Know Your Customer (KYC) verification, or directly via a protocol’s website. However, geographical restrictions are common. For instance, many US retail users face barriers to purchasing tokenized treasury coins due to securities laws that classify them as securities, limiting access to qualified or offshore investors. Minting new stablecoins—depositing dollars with an issuer to create new tokens—is also often restricted to banks, payment firms, or qualified institutional investors. Circle, for example, allows only approved institutional partners to mint USDC directly, meaning retail users must purchase USDC already in circulation.
   
3. Holding for yield: Once acquired, simply holding these stablecoins in your digital wallet can be sufficient to earn yield. Some employ a “rebasing” mechanism, where your token balance automatically increases daily, while others utilize “wrapped tokens” that grow in value over time. It’s worth noting a subtle difference: some yield-bearing stablecoins distribute returns through token appreciation rather than by issuing additional tokens. This means your balance remains the same, but each token becomes redeemable for a greater amount of underlying assets over time—a distinction that can influence tax calculations in various jurisdictions.
   
4. Leveraging DeFi for enhanced earnings: Beyond their inherent yield, many holders integrate these tokens into various DeFi protocols, such as lending platforms, liquidity pools, or structured vaults, to potentially generate additional income streams. This strategy, however, introduces further layers of complexity and risk, demanding careful consideration.
   
5. Tracking and recording income: Even as your tokens automatically grow, tax regulations in most countries treat these increases as taxable income at the moment they are credited. Meticulous record-keeping is therefore essential, documenting precisely when and how much yield you received.
   

Distinguishing between types: examples of yield-bearing stablecoins

It’s important to differentiate between products that merely resemble yield-bearing stablecoins and those that truly fit the description:

• True yield-bearing stablecoins: These are pegged to the US dollar, backed by verifiable reserves, and specifically designed to deliver yield.
  
  • USDY (Ondo Finance): A tokenized note backed by short-term treasuries and bank deposits, USDY is generally accessible only to non-US users who have completed full KYC and Anti-Money Laundering (AML) checks. Transfers into or within the US are restricted. It functions as a rebasing instrument, reflecting Treasury yields.
  • sDAI (Sky): This is a wrapper around DAI deposited into the Dai Savings Rate module. Your balance grows at a variable rate determined by MakerDAO’s governance. While widely integrated in DeFi, its yield relies on smart contracts and protocol decisions, not insured deposits.
• Synthetic stablecoins: These mimic stablecoins but employ derivatives or other sophisticated mechanisms rather than direct reserves.
  
  • sUSDe (Ethena): Described as a “synthetic dollar,” sUSDe maintains its peg by balancing a long spot crypto position with short perpetual futures. Holders earn returns from funding rates and staking rewards. However, returns can compress rapidly, and risks include market volatility and exchange exposure.
• Tokenized cash equivalents: These are not technically stablecoins but are frequently utilized in DeFi as “on-chain cash.”
  
  • Tokenized money market funds (e.g., BlackRock’s BUIDL): These represent tokenized shares in money market funds and pay monthly dividends in the form of new tokens. Access is typically restricted to qualified investors and institutions, making them popular with DeFi protocols but largely unavailable to retail users.

The 2025 regulatory landscape for stablecoins

Regulation has become a pivotal factor in the accessibility and viability of certain yield-bearing stablecoins.

• United States (GENIUS Act): In 2025, the US enacted the GENIUS Act, marking its first federal stablecoin legislation. A key provision strictly prohibits issuers of payment stablecoins from paying interest or yield directly to holders. This means tokens like USDC or PayPal USD cannot reward you simply for holding them. The aim is to prevent stablecoins from directly competing with traditional banks or being classified as unregistered securities. Consequently, any yield-bearing stablecoin offerings to US retail investors are typically structured as securities and are restricted to qualified investors or offered exclusively offshore to non-US users.
  
• European Union (MiCA): Under the Markets in Crypto-Assets (MiCA) framework, issuers of e-money tokens (EMTs) are similarly forbidden from paying interest. The EU’s approach clearly defines stablecoins as digital payment instruments, not as savings or investment vehicles.
  
• United Kingdom (Ongoing Rules): The UK is in the process of finalizing its own stablecoin regulatory framework, with an initial focus on issuance and custody. While an explicit ban on interest payments isn’t yet codified, the overarching policy direction mirrors that of the US and EU: stablecoins are intended for payments, not for generating yield.
  

The clear takeaway: always verify whether you are legally permitted to acquire and hold a specific yield-bearing stablecoin in your jurisdiction.

Crucial tax considerations

The tax treatment is as important as the choice of coin. In the US, staking-style rewards, including those from rebasing mechanisms, are generally considered ordinary income and are taxed as soon as they are received, no matter if they are sold. If you later sell these tokens for more than you paid, you’ll have to pay a capital gains tax. In 2025, new reporting requirements were introduced. These mean that crypto exchanges must issue Form 1099-DA. Taxpayers must carefully track their cost basis per wallet. This makes it important to keep accurate records.

New rules around the world mean that from 2026, crypto platforms will automatically report your transactions to the tax authorities. In the UK, HMRC guidance usually says that many DeFi returns are considered income, and token disposals can also be taxed as capital gains.

Understanding the risks

While the allure of yield-bearing stablecoins is strong, they are not without risk:

• Regulatory risk: Laws and regulations can change rapidly, potentially restricting access or even leading to the discontinuation of certain products.
• Market risk: For synthetic models, the generated yield is highly dependent on the volatile crypto markets and can vanish or significantly decrease overnight.
• Operational risk: Smart contracts, custody arrangements, and governance decisions within protocols all carry inherent risks that could impact your holdings.
• Liquidity risk: Some stablecoins may impose restrictions on redemptions, limiting who can convert tokens back to fiat or when they can do so, or even enforce lock-up periods.

So, while stablecoins can be a good way to make money, they are not the same as putting your money in a regular bank account. Each type of model—whether it is supported by the Treasury, is native to DeFi, or is synthetic—has its own advantages and disadvantages. The smartest approach is to be careful when choosing the size of positions, to spread your money across different issuers and strategies, and to keep an eye on regulatory developments and redemption policies. Basically, it’s better to think of stablecoin yields as a type of investment, not as a risk-free way to save money.