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Yield Farming Taxes: The Complete Guide 2023

José Beteta

Written by José Beteta, Reviewed by David Canedo, CPA

Jun 1, 2023

Are you considering yield farming in DeFi but have no idea about the potential tax implications of these transactions? Billions have flown lately into yield farming protocols across multiple chains, generating profit for many crypto investors. Yield farming can be a lucrative venture, but not handling the associated taxes properly can easily lead to losses. In this regularly-updated guide written by tax experts, we break down the latest guidance on yield farming taxes. Understand the tax implications of how yield farming is taxed and learn essential tips on how to minimize your crypto taxes with Accointing.

Last Updated: Jun 1, 2023

What is Yield Farming?

Yield farming is a DeFi investment activity that involves delegating digital assets into a liquidity pool via smart contracts in exchange for extra tokens. Yield farmers lock up their crypto funds in a decentralized application (dApp) to receive tokens in return. Users can choose to receive the rewards in their wallets or reinvest it back into the liquidity pool. The catch in these protocols is the attractive annual percentage yields (APYs) offered.

How is Yield Farming Taxed?

Although we have no clear tax guidance on yield farming transactions, they aren't exempt from taxation. Yield farming is taxable in the US. Keep in mind that yield farming includes numerous transactions that can be classified according to existing crypto tax rules.

In short, any income derived from farming activities is subject to ordinary income tax. If you're trading or selling crypto received from yield farming, that would fall under capital gains tax.

Tax Implications of Yield Farming

• Earning interest or rewards paid out in a token for locking your money within a dApp is subject to the ordinary income tax at the Fair Market Value (FMV) at the moment the tokens were received.

• Selling tokens received through yield farming falls under the scope of capital gains tax, regardless of whether you make a profit or loss, you must record the sale on your taxes whether you sell the tokens for fiat money or other cryptocurrencies.

• Certain yield farming activities can be regarded as crypto disposals and be subject to capital gains tax. For example: exchanging your assets for LP tokens, could result in a capital gain or loss depending on the price change of the digital assets acquired. Therefore, the value fluctuation of your LP tokens, including the value of the cryptocurrency you got as a reward, may result in a capital gain if you redeem them for another asset.

Types of Taxes Associated with Yield Farming

When it comes to yield farming, the tax implications can vary depending on the specific details of your transactions. In summary, yield farming activities may be subject to income tax, while others may be subject to capital gains tax. To prevent any potential tax-related concerns, it is essential to stay up to date on the most recent tax laws and appropriately classify your transactions.

Capital Gains Tax

Every time you buy, sell, or use your crypto assets, you'll be subject to capital gains taxes (CGT). This is because crypto is classified as property for tax purposes. In order to calculate your taxable gain or loss simply subtract the cost basis (i.e. acquisition cost plus any transaction fees), which is the amount you receive for your cryptocurrency in USD.

The IRS considers virtual currency as taxable property for federal income tax purposes. The agency issued Notice 2014-2, along with FAQs, to clarify that gains and losses on the disposition of crypto assets are subject to capital gains taxes.

Ordinary Income Tax

Crypto income in any form, including yield farming rewards, is subject to income taxes and must be reported on your income tax return. If you receive more coins or tokens in your wallet or exchange account compared to what you had before, the new tokens received should be taxed as ordinary income based on their value at the time of receipt.

The IRS issued the Notice 2014-21 and the Rev. Rul. 2019-24 in order to provide guidance on airdrops, hard forks, and mining. In both cases, the IRS concluded that new units of cryptocurrency received by the taxpayer are considered income for tax purposes. Although there is no formal tax guidance on yield farming income, it is generally treated the same as mining income.

Special Tax Rules for Comp Tokens and LP Tokens

LP tokens tax rules

Liquidity pools are contracts used in decentralized exchanges that allow users to pool funds and earn a portion of generated trading fees in exchange for providing assets via Liquidity Pool tokens.

• Swapping crypto tokens or coins for LP tokens is a taxable event that falls under CGT. Like with any other type of token swap, the profit or loss is based on the difference in value.

• Any rewards received are taxed when you have control over them under the income tax.

• Trading LP tokens back for original coins or tokens are also a taxable event under CGT based on the tax basis of LP tokens compared to the value of the coins or tokens received (this is taxable due to the impermanent loss risk - which means you don't have control over original coins).

Comp tokens tax rules

If you receive income from yield farming it's taxed under the income tax at the FMW when the tokens were received. Compounding rewards is essentially the same as if you had taken the coins and staked them yourself to earn more yield. This means that you will keep getting more income. It's a similar concept to owning a stock and reinvesting the dividend back into the stock. The only difference is that the dividend is taxed as ordinary income while increasing your position is a nontaxable event. However, it becomes tax relevant once you sell the stock or token in this specific case.

Strategies to Minimize Your Tax Burden from Yield Farming

Keep track of all crypto transactions

Accurately record every transaction you make to be able to determine your tax obligations. This includes tracking the initial cost basis of any crypto asset, the value of any rewards received, and any fees paid. Use a crypto tax software like Accointing to simplify the tax reporting process.

Track your crypto portfolio with Accointing for FREE.

Consider Holding for the Long Term

If you hold your assets for more than a year, you may qualify for long-term capital gains tax rates, which are typically lower than short-term rates. Always consult with your tax advisor.

Take Advantage of Tax-loss Harvesting

If you have losses from yield farming, you can use them to offset any gains you have realized during the tax year. This can help reduce your tax liability if done properly, to do so use the trading tax optimizer (TTO) to save hundreds and even thousands of dollars in taxes.

Use Decentralized Exchanges and Centralized Exchanges Appropriately

If you're a user on both centralized finance (CeFi) and DeFi platforms, you should keep track of all your transactions across all addresses to benefit from tax optimization advantages. Some examples include identifying internal transactions between same wallets, which are tax-free transactions, or offsetting losses to reduce your capital gains.

Keeping track of your crypto transactions is crucial for reporting your taxes accurately. This includes important details such as the cryptocurrency's description, acquisition date, disposal date, proceeds, cost basis, and gains or losses.

Understand the Difference between Long-term and Short-term Gains

Depending on whether capital gains are long-term or short-term, taxpayers in the US are liable to various tax rates. In order to encourage investors to stay in their investments for longer periods of time, long-term gains are taxed at a reduced rate, whereas active traders are subject to higher conventional tax rates.

Pivot on the taxpayer's usual tax rate, long-term gains from cryptocurrencies held for more than a year will be taxed at rates of 0%, 15%, or 20%. The marginal tax rate of the taxpayer, which can range from 10% to 37%, will be applied to short-term gains from cryptocurrencies held for a year or less. If you run into any questions regarding capital gains or crypto taxes FAQs, check out the Crypto Tax Guide 2023.

Calculate Cost Basis Accurately

Calculating the cost basis for yield farming transactions is a crucial part of complying with US tax laws. The cost basis essentially represents the acquisition cost of your crypto, including any fees, which is necessary for calculating capital gains or losses when the asset is sold or traded.

For yield farming transactions, determining the cost basis can be more complex due to the variety of tokens involved, the duration of the yield farming period, and any rewards earned during that period. To simplify the process, it's recommended to use a first-in, first-out (FIFO) or weighted-average cost basis method.

Cost Basis Example

Let's assume Bob invested $10,000 worth of ETH in a liquidity pool. During the yield farming period, the farmer earned rewards in the form of UNI and DAI tokens. Over time, the farmer earned 100 UNI tokens worth $500, and 100 DAI tokens worth $100.

Using the FIFO cost basis method, the first 100 UNI and 100 DAI tokens earned would be considered to be sold or disposed of first when the farmer chooses to liquidate their investment. The cost basis for those tokens would be the value of the original investment at the time they were earned, which was $10,000.

If the farmer decides to sell all of their UNI and DAI tokens when they are worth $700, their capital gains would be $200 ($700 - $500). The cost basis for the UNI and DAI tokens would be $10,000, resulting in a net gain of $1900 ($700 - $200 capital gains - $10,000 cost basis).

It's important to keep track of all transactions and rewards earned during a yield farming period to accurately calculate the cost basis and report any capital gains or losses on tax returns.

Consult a Tax Professional

The tax rules for yield farming can be complex, so it's important to consult a tax advisor for advice and to fully understand your tax obligations and identify strategies for minimizing your tax burden.

Accointing's crypto tax platform can help with reporting your yield farming taxes. The tool provides a complete overview of your transactions, automatically calculates your tax liability, and generates an accurate tax report based on your data from connected wallets and exchanges.

IRS Guidance on Yield Farming Taxes

Currently, there are no specific tax rules for yield farming. However, any new cryptocurrency received as a reward from yield farming is considered income and must be reported for income tax purposes. If you sell the reward asset for a profit or swap it for another cryptocurrency, it will be subject to capital gains tax as a crypto-to-crypto trade. It's important to stay informed about tax regulations and consult with a tax advisor for guidance.

Pros and Cons of Yield Farming


  • High potential returns on investment (APYs)
  • Opportunity to earn passive income
  • Provides liquidity to decentralized finance protocols
  • Can serve as a hedge against inflation if done properly and with a solid strategy
  • Offers a chance to participate in emerging blockchain projects


  • High risk of impermanent loss, that’s basically when the profit earned is less than what you would have earned by just holding the assets separately.
  • Uncertainty around tax regulations
  • Requires some advanced knowledge regarding DeFi
  • Vulnerable to market volatility and smart contract risks (exploits, rug pulls, and many more)
  • Users may incur high gas fees and transaction costs

How can Accointing Help with Reporting Yield Farming Taxes

Accointing is a cryptocurrency tax software that simplifies the tax reporting process for yield farmers. The crypto tax software is designed to automatically import data from various exchanges and wallets, making it easy to calculate your tax liability accurately.

To report yield farming taxes with Accointing, you need to go through four easy steps:

Step 1: Import your cryptocurrency transactions by connecting all your wallets and exchanges.

Step 2: Classify your transactions. The tool will automatically calculate your cost basis, profit or loss, and rewards.

Step 3: Calculate your tax liabilities by simply following the review steps: "Unknown currencies," "Identify internals," "Classify transfers," and "Missing funds". These are crucial for ensuring that your cryptocurrency portfolio is accurately tracked and organized on the platform.

Step 4: Generate a tax report and file it with your preferred tax filing software. For more details, check out our Tax Filing Guide for 2023. 

Main Takeaways

• Yield farming transactions fall either under capital gains tax or income tax, depending on the nature of the crypto transaction and your investment strategy. The regulatory landscape is still evolving, so keeping up with the latest guidance is important to stay compliant.

• Yield farmers should carefully study the relevant tax laws and regulations to maximize their returns while staying on the right side of the law. Check out our complete US Crypto Tax Guide for 2023 for more details. 

• Using a crypto tax tool like Accointing for calculating your taxes can simplify the process of getting a tax report, especially if you are dealing with complex DeFi transactions. You only need to connect all your wallets containing the yield farming transactions. From here, the tool will automatically calculate any gain, loss, income and internal transactions.