Do you have to pay taxes on growing yields?
Yield farming is becoming more and more popular with the advent of DeFi protocols such as AAVE and Compound and the advent of decentralized exchanges such as Uniswap, SushiSwap or PancakeSwap.
Billions of dollars are locked (allocated) in DeFi protocols, where investors receive interest or tokens as a return on their investment. How are crypto revenue farming bonuses taxed in the US? Let’s find out.
How does crypto cropping work?
Return farming consists of locking funds (allocation of funds) into the DeFi protocol, where you will receive a return in the form of interest, fees or new tokens.
Popular decentralized exchanges like Uniswap or SushiSwap have secured billions of dollars while offering attractive annual returns (APYs) to attract investors.
Investors can get interest in the form of stablecoins, a percentage of transaction fees, or new tokens from the protocol they have held the funds in. Let’s find out how agricultural yield taxes work in the United States.
Do you pay taxes on growing yields?
Yes, yield farming is taxable in the United States.
When you receive interest or a percentage of the transaction fee when you hold funds in a protocol, you are essentially getting income, similar to receiving interest from making a regular loan, which is subject to tax.
Yield farming and cryptocurrency storage are on the same tax basis since you receive benefits/rewards from investing your cryptocurrency, which are taxable events in the United States.
You need to assess the fair market value (FMV) in US dollars for each interest/fee you receive, which will add to your total income for the year. The amount of interest you receive will likely increase your total taxable income for the year, as you will have to pay income taxes according to your income level.
Do you pay taxes on cryptocurrency interest?
Any interest on cryptocurrencies must be recognized as income when received. You must assess the fair market value (in US dollars) of the interest you received, and this amount will add to your total income for the year. This is similar to gaining interest from yield farming or the rewards of storing cryptocurrency.
Check files Guide on How to Tax the Benefits of Cryptocurrency for more information.
How is liquidity mining taxed?
Liquidity mining means receiving new tokens from holding funds in the liquidity pool. You will receive new tokens based on the percentage you have secured the funds in the pool. This is likely the original token for the protocol you are using. Liquidity mining is a subset of yield farming, which can become very profitable due to the rapid appreciation of the value of new DeFi tokens.
How are new tokens taxed from liquidity mining?
You must determine the fair market value of the tokens in USD when you receive them. This will add to your total income for the year. The tax implications are the same as when you receive a benefit from common-yield farming. The income recognized will become the cost basis in those tokens.
Do You Have to Pay Taxes When Selling Mined Tokens?
If you later sell tokens that you received from mining liquidity, you will have to pay capital gains taxes if you have a profit. Either way, if you sell cryptocurrency or FIAT tokens at a profit/loss price, you will have to report that trade to your taxes.
Let’s imagine that you receive 100 units of X tokens of $1 each. By the time I received the new token X, I reported its fair market value ($100). After a year, each token is worth $10, and you decide to sell.
Your total sales revenue will be $1,000, 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 gain will be the difference between the sales revenue and the cost basis ($900). If you hold the tokens for longer than 12 months, you will be subject to the long-term capital gains tax rate, which ranges from 0% to 20%, depending on your status (for example, registration status). Hold cryptocurrency for the long term (For more than 12 months) Offers reduced tax rates in many countries.
Can you deduct fees from holding money on yield farms?
Fees paid to secure your money are usually considered an investment expense and, under current US tax law, are not deductible for individual investors. If you are a professional trader or operate an investment business, you may be able to deduct the fees as a business expense.
Decentralized exchange tax
In the United States, trading cryptocurrencies on decentralized exchanges is a taxable event. If you trade crypto-to-crypto on DEXes like Uniswap, SushiSwap or PancakeSwap, you will have to report these trades and determine the profit/loss on each trade. You will likely pay capital gains taxes on those trades if you have a profit.
Beyond deals, you can earn interest from providing liquidity to rallies or even receiving airdrops from new protocols. In these cases, you need to determine the fair market value (in USD) of the interest/tokens you received. You will need to recognize this as ordinary income and report it on your income tax return.
How is Uniswap taxed?
Cryptocurrency trading on Uniswap is a taxable event in the United States. If you exchange cryptocurrency on Uniswap, you are trading cryptocurrency for another cryptocurrency, which is a taxable event in the United States, subject to capital gains taxes.
If you provide liquidity to Uniswap and receive interest in return, you will have to determine the fair market value (in US dollars) and recognize it as ordinary income.
For more details, check out this guide on how to do Uniswap taxes.
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, check out our guide.
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Do you have to report new tax codes on income from agriculture?
Yes. Tokens you receive must be reported as ordinary income on your annual tax returns. You will pay income tax on it, depending on the level of total taxable income in the United States.
If you later sell the new tokens you received from liquidity mining, you must determine the profit/loss on each trade and report it on Form 8949 and Schedule D of your Form 1040.
For more information on reporting crypto taxes, see this guide on how to report crypto taxes.
How do you tax crop farming?
Here’s how to do crop planting taxes in 3 steps:
Import your trades from DeFi protocols and decentralized exchanges into a crypto tax software like CoinTracking.
Determine the fair market value of the interest you received in US dollars.
Report this income on your income tax return.
Learn how to import your DEX trades into CoinTracking for taxes:
Best DeFi Tax Software: CoinTracking
CoinTracking is the best DeFi tax software on the market, allowing you to easily import DEX trades like SushiSwap and automatically calculate your winnings while generating all necessary tax reports.
If you are using an Ethereum-based DEX, you can easily import your trades in a few minutes with our ETH + DEX importer. After importing your trades, you can select one of the 12 accounting methods that CoinTracking supports, and we’ll calculate your winnings for each trade while generating tax reports.
If you are in Australia, UK or Germany, our software fully supports the different accounting methods used in those countries to generate compatible reports.
Flawless Farm Taxes Collected: Complete US Coin Tracking Service.
CoinTracking also offers a full service for US traders. A crypto settlement tax expert from Polygon Advisory Group, a leading US tax firm, will review your CoinTracking account, help fix any errors, and ensure your crypto tax reports are submitted flawlessly.
Do you have any questions about crypto taxes? Check out the best guides:
DeFi Taxes: The Complete Guide.
How to save taxes with a Bitcoin IRA.
Do you pay taxes to receive bitcoin tips?
Uniswap Taxes Instructs
Is cipher wrap taxable?
How do you calculate taxes at the average dollar cost of bitcoin?
Do you pay taxes on stolen, hacked or lost cryptocurrency?
FIFO for Crypto Taxes? The implications of accounting methods.
NFT Taxes: The Complete Guide.
NFT Guide 2021 (with taxes).
Is bitcoin taxable? The Ultimate Guide to Taxes for 2021.
Do You Pay Taxes on Bitcoin Debit Card Purchases?
Is bitcoin taxable? The Ultimate Guide to Taxes for 2021.
The most tax-friendly countries for cryptocurrency.
How do you reduce your crypto taxes?
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This post is part of the Crypto Taxes AMA series. Follow the weekly AMAs on Twitter as our expert CPA Sharon Yip answers your crypto tax questions. You can download 30+ AMA Crypto Tax Report for free.
Disclaimer: All information provided above is for informational purposes only and should not be considered professional, legal or tax advice. You should do your own research or consult with a professional financial advisor when investing.