How is Yield Farming Taxed?
Yield farming offers crypto investors a means to maximize gains from their portfolio - but it may have big tax implications. Learn how yield farming is taxed in our complete guide.
Before we jump in - if you want to learn about yield farming and how it works, check out our Yield Farming Guide.
How is yield farming taxed?
DeFi is a new phenomenon, which means most tax offices haven’t yet issued specific guidance on yield farming taxes. Before you jump for joy, that doesn’t mean yield farming isn’t subject to tax. Rather, investors need to take the current crypto tax rules in their country and apply them to their yield farming transactions.
Yield farming is built up of multiple transactions, many of which are already covered in crypto tax rules. In fact - from a tax perspective, it’s pretty straightforward under current guidance in most countries.
Generally speaking, your crypto transactions will either be seen as a kind of income - and subject to Income tax - or as a capital gain - and subject to Capital Gains Tax. You just need to figure out how the tax office would view your different yield farming transactions.
Income Tax on yield farming
From a tax perspective, income is any time you’re seen to be earning new crypto coins or tokens - like a regular income. Examples of crypto income that exist in current crypto tax guidance include:
Being paid in crypto for a service.
There are many transactions in yield farming that could be viewed as income. For example, you might earn new tokens in return for depositing an asset into a liquidity pool - like COMP tokens or SUSHI tokens. New tokens are more likely to be seen as a kind of income and subject to Income Tax based on the fair market value at the time you receive them (in your country's fiat currency).
Capital Gains Tax on yield farming
Crypto isn’t seen as an actual currency by most countries. Instead, it’s viewed as an asset - like a stock. From a tax perspective, this means many of your crypto transactions are viewed as a ‘disposal of an asset’ and subject to Capital Gains Tax. Examples of crypto disposals include:
Selling crypto for fiat currency.
Swapping crypto for crypto.
Spending crypto on goods or services.
Gifting crypto (in most countries).
So anytime you sell, swap, or spend crypto in the course of yield farming - this would be subject to Capital Gains Tax. For example, if you added capital to a liquidity pool and received a liquidity pool token in return - this is likely going to be seen as a crypto to crypto swap, and any gain may be subject to Capital Gains Tax. Similarly, when you remove your capital by exchanging your liquidity pool tokens back, this would be another swap, and any gain is potentially taxable.
Check your crypto tax rules
Most tax offices have a similar view on crypto taxation, but you should always check your country’s specific crypto tax rules as there are small differences between them all. You can find out more in our crypto tax guides:
Calculate crypto taxes with Koinly
Koinly calculates your crypto tax for you. All you need to do is sync the wallets, exchanges, or blockchains you use and Koinly will import your crypto transaction data. From here, it will identify the different transactions and calculate your income, capital gains and losses, and expenses.
All this information is summarized for you on your tax reports page. You can also download a variety of specific tax reports, ready to submit to your tax authority.
Yield farming doesn't have specific tax rules yet - but that doesn't mean it isn't taxed.
If you're earning income through yield farming - this will be subject to Income Tax.
If you're making a gain through yield farming - this will be subject to Capital Gains Tax.
You should check your country's specific crypto tax rules and speak to a tax advisor.