Do you have to pay taxes on yield farming?
Yield farming became more popular with the advent of DeFi protocols like AAVE and Compound and the emergence of decentralized exchanges like Uniswap, SushiSwap or PancakeSwap.
Billions of dollars have been locked (allocated) in DeFi protocols, where investors receive interest or tokens in return for their investment. How are crypto yield farming rewards taxed in the US? let’s find out
In this article:
- How does crypto yield farming work?
- Do you pay taxes on yield farming?
- Do you pay taxes on crypto interest?
- How is liquidity mining taxed?
- How are new tokens from liquidity mining taxed?
- Do you have to pay taxes when selling Liquidity Mining Tokens?
- Can you deduct fees from lock money in yield farms?
- Decentralized stock exchange taxes
- How is Uniswap taxed?
- Do you have to report new tokens from yield farming income for tax purposes?
- How do you do your income farm taxes?
- Learn how to import your DEX trades into CoinTracking for taxes
- The best DeFi control software: CoinTracking
How does crypto yield farming work?
Yield farming consists of locking funds (allocation of funds) in a DeFi protocol where you receive a return in the form of interest, fees or new tokens.
Popular decentralized exchanges like Uniswap or SushiSwap have locked up billions of dollars while offering attractive Annual Percentage Returns (APYs) to attract investors.
Investors can receive interest in the form of stablecoins, a percentage of transaction fees, or new tokens from the protocol they locked funds into. Let’s find out how yield farming taxes work in the US.
Do you pay taxes on yield farming?
Yes, yield farming is taxable in the US.
If you receive interest or a percentage of transaction fees when you lock funds into a log, you are essentially receiving income, similar to interest from providing a regular loan that is taxable.
Yield farming and crypto staking share the same tax base as you receive interest/rewards from investing your crypto which are US taxable events.
You must assess the Fair Market Value (FMV) in USD of any interest/fees you receive, which contributes to your total income for the year. The amount of interest you receive will likely increase your total taxable income for the year in which you will have to pay income taxes based on your income level.
Do you pay taxes on crypto interest?
All crypto interest must be recorded as income when received. You must estimate the fair market value (in USD) of the interest you have received and this amount will be added to your total income for the year. This is similar to gaining interest through yield farming or crypto staking rewards.
For more information, see our guide to crypto interest taxation.
How is liquidity mining taxed?
Liquidity mining means getting new tokens from locking funds in a liquidity pool. You will receive new tokens based on the share you have contributed to the pool. These are likely the native tokens of the protocol you are using. Liquidity mining is a subspecies of yield farming that can become very lucrative given the rapid increase in value of new DeFi tokens.
How are new tokens from liquidity mining taxed?
You must determine the fair market value of the tokens in USD when you receive them.
This increases your total income for the year. The tax implications are the same as receiving interest from common income farming. Recognized income becomes your cost basis in these tokens.
Do you have to pay taxes when selling Liquidity Mining Tokens?
If you later sell the tokens you received from the liquidity extraction, you will have to pay capital gains taxes if you made a profit. Either way, if you sell the tokens for crypto or FIAT for a profit/loss, you must report that trade to your taxes.
Let’s imagine you received 100 units of Token X, worth $1 each. When you received the new token X, you reported its fair market value ($100). A year later, each token is worth $10 and you decide to sell it.
Your total sales proceeds are $1000 and your cost basis is the fair market value (in USD) of the tokens ($100) at the time you first receive the tokens. The capital gains are the difference between the sale proceeds and the cost basis ($900). If you hold the tokens for more than 12 months, you will be subject to a long-term capital gains tax rate ranging from 0% to 20% depending on your situation (e.g. filing status).
Long-term holding of crypto (over 12 months) offers reduced tax rates in several countries.
Can you deduct fees from lock money in yield farms?
Fees paid to freeze your funds are generally considered investment expenses and are not deductible under current US tax law for individual investors. If you are a professional trader or run an investment business, you may be able to deduct the fees as a business expense.
Decentralized stock exchange taxes
In the US, trading crypto on decentralized exchanges is a taxable event. If you trade crypto to crypto on DEXs like Uniswap, SushiSwap or PancakeSwap you need to report these trades and determine the profit/loss on each trade. You’re likely to pay capital gains taxes on these trades if you make a profit.
Beyond trading, you can earn interest by providing liquidity to pools or even getting airdrops from new protocols. In these cases, you must determine the fair market value (in USD) of the interest/tokens received. You must recognize this as ordinary income and state it in your income tax return.
How is Uniswap taxed?
Trading crypto on Uniswap is a taxable event in the US. When you swap crypto on Uniswap, you are trading crypto for another crypto, a taxable event in the US subject to capital gains tax.
If you provide liquidity to Uniswap and receive interest in return, you must determine the fair market value (in USD) and account for it as ordinary income.
Check out this guide to conducting your Uniswap taxes for more information.
CoinTracking also supports PancakeSwap taxes, SushiSwap taxes or any ETH or BSC based decentralized exchanges. If you have any doubts about how to report your DeFi taxes, read our guide.
Sign up for CoinTracking today!
Do you have to report new tokens from yield farming income for tax purposes?
Yes. The tokens you receive must be reported as ordinary income on your annual tax return. You pay income tax on it based on your total taxable income in the United States.
If you later sell new tokens received from liquidity extraction, you must determine the profit/loss on each trade and report this on Form 8949 and Appendix D of your Form 1040.
For more information on crypto tax reporting, see this crypto tax reporting guide.
How do you do your income farm taxes?
How to settle your yield farming taxes in 3 steps:
- Import your trades from DeFi protocols and decentralized exchanges into a crypto control software like CoinTracking.
- Determine the fair market value of the interest you received in USD.
- State this income in your income tax return.
Learn how to import your DEX trades into CoinTracking for taxes:
The best DeFi control software: CoinTracking
CoinTracking is the best DeFi tax software out there that allows you to easily import your DEX trades like SushiSwap and have your profits automatically calculated while generating all the tax reports you need.
If you are using an Ethereum-based DEX, you can easily import your trades in minutes with our ETH+DEX importer. After importing your trades, you can choose one of the 12 accounting methods supported by CoinTracking and we calculate your profits for each trade while we generate the tax reports.
If you are located in Australia, UK or Germany our software fully supports the different accounting methods used in these countries to generate compliant reports.
Income taxes without error: CoinTracking Full Service in the USA.
CoinTracking also offers a full service for US traders. A crypto voting tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help troubleshoot errors, and ensure you submit your crypto tax reports error-free.
Do you have questions about the crypto tax? Check out the best guides:
- DeFi Taxes: The Complete Guide.
- How to save on taxes with a Bitcoin IRA.
- Do you pay taxes for receiving bitcoin tips?
- Uniswap Control Guide
- Is crypto packaging taxable?
- How to Calculate Taxes with Bitcoin Dollar Cost Averaging?
- Do you pay taxes on stolen, hacked or lost cryptocurrencies?
- FIFO for crypto taxes? Impact of Accounting Policies.
- NFT Taxes: The Complete Guide.
- NFT Guide 2021 (with taxes).
- Is Bitcoin taxable? The Ultimate Guide to Taxes in 2021.
- Do you pay taxes on bitcoin debit card purchases?
- Is Bitcoin taxable? The Ultimate Guide to Taxes in 2021.
- Top Crypto Tax Friendly Countries.
- How can you reduce your crypto taxes?
- Crypto Tax Loss Harvest: Here’s what you need to know
This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA Sharon Yip answers your crypto tax questions. You can download 30+ AMA crypto tax reports for free.
Disclaimer: All information provided above is for informational purposes only and should not be taken as professional investment, legal or tax advice. You should do your own research or consult a professional financial advisor when investing.
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