Are staking rewards taxed as income?

Yes, in most jurisdictions staking rewards are taxed as ordinary income when received. The fair market value at receipt becomes your cost basis for future capital gains calculations.

Is adding liquidity to a pool a taxable event?

It depends on your jurisdiction and the specific pool. If adding liquidity requires swapping tokens, that swap may be taxable. The creation of LP tokens may also be considered a taxable event in some cases.

How do I track DeFi taxes?

Use DeFi-compatible tax software that can import transactions from your wallet addresses. These tools can categorize staking rewards, LP positions, and swaps automatically.

Can I deduct impermanent loss?

The tax treatment of impermanent loss is unclear in many jurisdictions. Generally, losses may only be realized when you withdraw from the pool. Consult a tax professional for guidance.

DeFi Crypto Taxes 2026: Complete Guide

What is DeFi and Why Does It Matter for Taxes?

Decentralized Finance (DeFi) refers to financial services built on blockchain technology that operate without traditional intermediaries. While DeFi offers innovative ways to earn yield on crypto assets, each interaction can create taxable events.

Tax authorities are increasingly focused on DeFi activities. Understanding how your DeFi positions are taxed can help you stay compliant and optimize your tax strategy.

Common Taxable DeFi Activities

Staking Rewards

Staking rewards are generally taxed as ordinary income when received. The fair market value at the time of receipt becomes your cost basis for future sales.

Taxed as: Income

Liquidity Pool (LP) Tokens

Adding liquidity to a pool may be a taxable event if you're exchanging tokens. LP tokens represent your share of the pool and have their own cost basis.

Taxed as: Capital Gains (potentially)

Yield Farming Rewards

Tokens earned from yield farming are typically taxed as income when received. Subsequent sales trigger capital gains calculations.

Taxed as: Income + Capital Gains

Lending Interest

Interest earned from lending crypto on DeFi platforms is taxed as ordinary income, similar to traditional interest income.

Taxed as: Income

DeFi Tax Calculation Challenges

Impermanent Loss

Impermanent loss in liquidity pools may not be tax-deductible until you withdraw. The tax treatment varies by jurisdiction and is still being clarified by many tax authorities.

Token Swaps

Every token swap, even within DeFi protocols, is typically a taxable event. This includes swapping LP tokens, claiming rewards, and using DEX aggregators.

Gas Fees

Gas fees for DeFi transactions can often be added to your cost basis or deducted as investment expenses, depending on your jurisdiction.

Best Practices for DeFi Tax Compliance

Track Every Transaction

Use blockchain explorers and DeFi-compatible tax software to track all protocol interactions, including small reward claims and governance token distributions.

Document Cost Basis

Record the fair market value of tokens at the time you receive them. This establishes your cost basis for future capital gains calculations.

Use Specialized Software

Consider using crypto tax software that specifically supports DeFi protocols. Many can connect directly to your wallet addresses and categorize transactions automatically.

CryptoTaxList