What is APY in crypto, and how is it different from APR?

APY in crypto means annual percentage yield, the return you would earn over a year if your earnings were reinvested along the way. It is the same idea banks use for savings accounts. Crypto platforms quote APY for staking, lending and DeFi pools, but the number rarely works the way a fixed bank rate does.

What does APY mean?

In US banking rules, the Consumer Financial Protection Bureau's Regulation DD defines APY as a percentage that reflects the total interest paid on an account, based on compounding over 365 days. Compounding means earnings are added to the balance and then earn returns of their own.

The same rules treat "interest rate" as the plain yearly rate, without compounding. Banks may call that rate the annual percentage rate. Crypto platforms use both terms loosely, and they are not bound by these bank disclosure rules.

What is the difference between APY and APR?

APR ignores compounding. APY includes it. So with the same starting rate, APY is equal to or higher than APR.

A simple example: a 10% APR with earnings added back once a month works out to about 10.47% APY. Added back daily, it becomes about 10.52% APY. The gap grows as rates get higher and compounding gets more frequent.

This is why it matters which figure a platform shows. A lender may quote APR on loans, which looks lower, and APY on deposits, which looks higher. Comparing an APR with an APY is not a like-for-like comparison.

How does APY work for staking and DeFi?

In crypto staking, the rate depends on what the network pays out. Coinbase, for example, says its staking APY is a backward-looking figure based on rewards actually paid over a recent period, after its commission, and that rates vary and are not guaranteed.

On DeFi lending protocols such as Aave, the rate moves with demand. Supplier earnings come from interest that borrowers pay, and that interest rises and falls with how much of a pool is lent out. Pools used in yield farming may add extra token rewards, which can push a displayed APY far above what lending alone pays.

A few things a quoted crypto APY may not show:

• It is variable. It can drop the day after you deposit.
• It is paid in crypto. A high yield paid in a token that falls in price can still lose money in dollar terms.
• It is not insured. The SEC warned in 2022 that crypto interest accounts are not bank deposits and lack FDIC or NCUA insurance, and that investors may not be made whole if the platform fails.

Is APY earned on crypto taxed?

In the United States, the IRS says income from digital assets is taxable, and it lists rewards from staking and similar activities among items to report. More detail is in is crypto interest taxable.

Rules differ by country and change often. Check the tax authority or a qualified professional for your own situation.