Digital Assets: Building Passive Income Through DeFi

A hardware wallet (cold storage) is the most secure way to hold Bitcoin long-term. Your private keys exist on a dedicated device that never connects to the internet.

Key principles:

When you transfer personal Bitcoin into your LLC, that’s a capital contribution. Record it at fair market value on the contribution date. This is what goes on your balance sheet.

For tax purposes, however, the LLC inherits your original personal cost basis. If you bought Bitcoin at $45,000 and contribute it when it’s worth $100,000, the LLC’s book value is $100,000 but the tax basis remains $45,000. Keep a written memo documenting both values, the transaction hash, and the source and destination addresses.

Draft a member resolution for every contribution and keep it on file. This isn’t optional paperwork; it’s what makes the contribution legitimate and auditable.

Some platforms offer interest on Bitcoin deposits. Your BTC balance grows as interest is credited, typically monthly.

What to look for:

Each interest credit is ordinary income at fair market value on the date received. Record it monthly.

Non-custodial vaults let you earn yield without giving up control of your keys. Your Bitcoin is held in an embedded wallet (typically wrapped to a chain-compatible token) and deployed into DeFi lending markets.

Key advantages:

Things to understand:

Tokenized strategy tokens represent a share of a managed investment strategy. There are two models:

NAV-accrual tokens: Your token count stays the same while the price per token increases as the strategy generates returns. This is the simpler model and potentially more tax-favorable — no taxable event occurs until you sell or dispose of the tokens.

Distribution tokens: New tokens appear in your wallet periodically. Each receipt is ordinary income at fair market value. This creates a taxable event every time tokens are credited.

The difference matters enormously for your tax liability. Confirm which model applies before investing.

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Install hledger and create a directory for your LLC’s books:

Organize your files:

Set the environment variable so hledger finds your file automatically:

Your chart of accounts should separate assets by location (cold storage, exchange, vault), track income by source (interest, yield, consulting), and categorize expenses granularly enough for Schedule C:

Record yield monthly using the BTC price on the last day of the month for consistency:

Maintain a price file and update it at least monthly:

You can automate price fetching with a simple script:

hledger gives you everything you need for management and taxes:

No taxable event for the Bitcoin itself. Unrealized gains don’t appear on your tax return. Report your business income (including yield) and expenses on Schedule C.

Report on Form 8949 and Schedule D. You need: date acquired, date sold, proceeds, and cost basis (using the carryover basis from your contribution memo). If held over one year, it’s a long-term capital gain.

All yield (interest, vault distributions, token distributions) is ordinary income reported on Schedule C Line 6 (Other income). Record it at fair market value when credited.

If you expect to owe more than $1,000 for the year, make quarterly estimated payments with Form 1040-ES. Track these in hledger so nothing falls through the cracks.