I wonder if that's really the case. It's also possible that, if you kept 10% and returned 90%, you'd still have to pay tax on the 100% (that is, the 90% you returned might not be deductible).

The top income tax bracket in the US is 37%, so the rational thing would be to keep 100%, pay taxes on it, and still come out on top.

He's offering not to tell the IRS though, what's a little tax fraud between friends?

It's not like Compound is able to do KYC on its users. There's nothing they can tell the IRS that the IRS can't see by just looking at the blockchain.

No, but most folks have addresses (with maybe one or 2 degrees of separation) that have interacted with centralized exchanges that have done the kyc. The only way to truly anonymously get assets in the Ethereum world is to run the funds through tornado cash (slow and expensive) or bounce through the shadiest non-kyc exchanges who very well could just pocket the funds you try to put through them.

You might be able to mine your way to anonymous funds, but that is even more expensive in terms of power and equipment costs.

Yes, but my point is that any information Compound could give the IRS is already public on chain. The IRS can just read it themselves.