Yield-bearing stablecoins include government bond-backed, DeFi, and synthetic models.

U.S. and EU laws prohibit issuers from paying interest, and access channels are often restricted.

Rebasing and rewards are taxed as income when received.

Risks still exist: regulation, market, contracts, and liquidity.

Investors have been seeking passive income, typically choosing assets like dividend stocks, real estate, or government bonds.

In 2025, a new option emerged in the cryptocurrency space: yield-bearing stablecoins. These digital tokens not only peg to the value of the dollar but can also continuously generate stable income in your wallet.

However, before participating, it is crucial to understand the definitions of these stablecoins, sources of income, and applicable legal and tax rules.

The following will be analyzed step by step.

Traditional stablecoins like Tether's USDT (USDT) or USDC (USDC) peg to the dollar, but holding them does not yield any income. Yield-bearing stablecoins are different: they automatically distribute returns from the underlying assets or strategies to token holders.

Currently, there are three main models:

Government bond and money market fund tokenization: These stablecoins are backed by safe assets like short-term U.S. government bonds or bank deposits. The income generated from holding these assets is distributed to token holders, usually by increasing the token balance or adjusting its value. In simple terms, they can be seen as traditional cash equivalent funds wrapped in blockchain.

Decentralized finance (DeFi) savings wrappers: Protocols like MakerDAO allow users to lock stablecoins like DAI (DAI) in a "savings rate" module. When wrapped as tokens like sDAI, the balance grows over time at a rate set by protocol governance.

Synthetic yield models: Some innovative stablecoins generate income through derivative strategies, utilizing funding rates or staking rewards in the crypto market. Returns may be higher but can also fluctuate due to market conditions.

The answer is yes, but specific details vary by product. Here is a typical process:

If you prefer low risk and traditional asset backing, you can choose government bond-backed or money market fund-backed tokens.

If you can accept DeFi risks, you might consider savings wrapper stablecoins like sDAI.

If you seek higher potential returns (but with higher volatility), synthetic stablecoins like sUSDe may be more suitable.

These tokens can typically be obtained directly through centralized exchanges (requiring KYC) or the protocol's official website.

However, some issuers may restrict access by region. For example, many U.S. retail investors cannot purchase government bond tokenized stablecoins, as securities laws classify them as securities, limited to qualified or offshore investors.

Additionally, there are usually certain restrictions on the minting of stablecoins. The minting process involves depositing dollars with the issuer, which then creates new stablecoins. However, this option is not open to everyone; many issuers only allow banks, payment companies, or qualified investors to mint.

For instance, USDC issuer Circle only allows approved institutional partners to mint directly. Retail users cannot deposit dollars with Circle and can only purchase USDC in circulation.

Once purchased, simply holding these stablecoins in your wallet may be enough to earn income. Some use rebasing (your balance increases daily), while others use wrapped tokens that appreciate over time.

In addition to built-in income, some holders also use these tokens in lending protocols, liquidity pools, or structured vaults to generate additional income streams. This adds complexity and risk, requiring careful operation.

Despite the automatic appreciation of tokens, tax laws in most countries stipulate that the appreciation is taxable income when recorded. Investors need to accurately track the timing and amount of income received.

Did you know? Some yield-bearing stablecoins distribute income through token appreciation rather than additional token issuance. This means the balance remains unchanged, but the underlying assets each token can be exchanged for increase over time. This subtle difference may affect the tax calculations in some jurisdictions.

Not all products that appear to be yield-bearing stablecoins are true stablecoins. Some are genuine stablecoins, some are synthetic dollars, and others are tokenized securities. Here are the specific classifications:

These are pegged to the dollar, supported by reserves, and designed to provide income.

USDY (Ondo Finance): This tokenized note is backed by short-term government bonds and bank deposits, available only to non-U.S. users, requiring full KYC and anti-money laundering (AML) checks. Transfers to or within the U.S. are restricted. USDY is a rebasing tool reflecting government bond yields.

sDAI (MakerDAO): sDAI is a wrapped token after depositing into the DAI savings rate module, with the balance growing at a variable rate determined by Maker governance. It is widely integrated into DeFi but relies on smart contracts and protocol decisions, not custodial deposits.

These mimic stablecoins but use derivatives or other mechanisms instead of direct reserves.

sUSDe (Ethena): By holding spot crypto assets and shorting perpetual contracts to stabilize the stablecoin price, it serves as a "synthetic dollar." sUSDe holders can earn income through funding rates and staking rewards. Returns can narrow quickly, with risks including market volatility and exchange risk.

These products are not stablecoins but are often viewed as "on-chain cash" in DeFi.

Tokenized money market funds (like BlackRock's BUIDL): Strictly speaking, these are not stablecoins but tokenized shares of money market funds. Dividends are paid monthly in the form of new tokens, available only to qualified investors and institutions, making them popular in DeFi, but difficult for ordinary users to access.

Regulation has become a key factor in whether specific yield-bearing stablecoins can be held.

In 2025, the U.S. passed its first federal stablecoin bill, the GENIUS Act. The core provision prohibits payment stablecoin issuers from directly paying interest or returns to holders.

This means tokens like USDC or PayPal USD (PYUSD) cannot earn rewards simply by holding them.

The bill aims to prevent stablecoins from competing with banks or becoming unregistered securities.

As a result, U.S. retail investors cannot legally earn passive income from mainstream stablecoins. Any yield-bearing versions are typically structured as securities, limited to qualified investors or aimed at offshore non-U.S. users.

Under the Markets in Crypto-Assets (MiCA) framework, electronic money token (EMT) issuers are also prohibited from paying interest. The EU strictly views stablecoins as digital payment tools rather than savings vehicles.

The UK is refining its own stablecoin regulations, focusing on issuance and custody. While there is currently no explicit prohibition, the policy direction aligns with that of the U.S. and EU: stablecoins should serve payments rather than yield.

Be sure to confirm whether it is legal to purchase and hold yield-bearing stablecoins in your region.

Tax treatment and choice of coin type are equally important.

In the U.S., staking rewards and rebasing income are taxed as ordinary income when received, regardless of whether the token is sold. If the token is later disposed of at a different price, capital gains tax will apply. Additionally, new reporting rules introduced in 2025 require crypto exchanges to issue Form 1099-DA, making it particularly important for taxpayers to accurately track cost basis by wallet.

In the EU and globally, new reporting rules (DAC8, CARF) stipulate that starting in 2026, crypto platforms will automatically report your transactions to tax authorities.

The UK’s HMRC guidance classifies most DeFi income as income, and token disposals are also subject to capital gains tax.

While yield-bearing stablecoins are attractive, they are not without risks:

Regulatory risk: Laws may change at any time, leading to product termination or inaccessibility.

Market risk: The income from synthetic models depends on the volatile crypto market and may disappear instantly.

Operational risk: Smart contracts, custody arrangements, and governance decisions can all affect your held assets.

Liquidity risk: Some stablecoins only allow specific investors to redeem or impose lock-up periods.

Therefore, while chasing yield from stablecoins may yield returns, it is not the same as keeping cash in a bank account. Whether government bond-backed, DeFi-native, or synthetic models, each has its pros and cons.

The best strategy is to cautiously allocate positions, diversify issuers and strategies, and continuously monitor regulations and redemption rules. Thus, viewing stablecoin yields as investment products rather than risk-free savings is the most prudent approach.

Related: Web3 white hat hackers earn millions, far exceeding the $300,000 annual salary of traditional cybersecurity roles.

Original article: “How to Earn Passive Crypto Income with Yield-Bearing Stablecoins in 2025”

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