What Are The Tax Implications Of Yield Farming?
- January 28, 2025
- 6 min read

Yield farming has become an increasingly popular strategy in the world of decentralised finance (DeFi), allowing cryptocurrency holders to earn additional returns on their assets. However, as with any financial activity, there are tax implications to consider. For crypto enthusiasts, understanding the tax treatment of yield farming is crucial to stay compliant with the Australian Taxation Office (ATO) regulations. This article will explore the tax implications of yield farming, providing valuable insights for investors and traders alike.
Understanding Yield Farming
Before delving into the tax implications, it’s essential to understand what yield farming entails. Yield farming is a DeFi strategy where users provide liquidity to various protocols in exchange for rewards, typically in the form of cryptocurrency tokens. This process often involves:
- Depositing assets into liquidity pools
- Earning rewards for providing liquidity
- Reinvesting rewards to compound returns
While yield farming can be a lucrative endeavor, it’s important to recognise that these activities have tax consequences.
ATO's Stance on Cryptocurrency
The Australian Taxation Office does not consider cryptocurrencies to be legal tender or foreign currency. Instead, crypto assets are treated as property for tax purposes. This classification means that most crypto transactions, including those related to yield farming, are subject to Capital Gains Tax (CGT) and Income Tax, depending on the nature of the transaction.
Income Tax on Yield Farming
Earning Rewards: When engaging in yield farming, you may receive new tokens or coins as rewards for providing liquidity. These rewards are generally considered income and are subject to Income Tax. The ATO requires you to report the fair market value of the tokens received as part of your assessable income in your tax return.
Calculating Income Tax: To calculate your tax liability on yield farming rewards:
- Identify all your yield farming transactions during the financial year
- Convert the value of the tokens received to Australian dollars
- Add the total value of your rewards to your assessable income for the year
The income will be taxed at your marginal tax rate, which depends on your total taxable income for the year.
Capital Gains Tax on Yield Farming
Disposing of Assets: In addition to Income Tax on rewards, yield farming activities may also trigger Capital Gains Tax (CGT) events. CGT applies when you dispose of your crypto assets, which can occur in several ways:
- Selling tokens for Australian dollars
- Exchanging one cryptocurrency for another
- Using crypto to purchase goods or services
- Gifting cryptocurrency to another person
Calculating CGT: To calculate your CGT liability:
- Determine the capital proceeds (the amount you received upon disposal)
- Subtract the cost base (the original cost plus any incidental expenses)
- The resulting figure is your capital gain or loss
If you’ve held the asset for more than 12 months, you may be eligible for a 50% CGT discount.
Example Calculation: Sam deposits AUD 10,000 worth of cryptocurrency into a yield farming protocol. After six months, he withdraws his initial deposit plus AUD 2,000 in rewards. The AUD 2,000 in rewards would be treated as income and taxed at Sam’s marginal tax rate. If Sam then sells all his crypto for AUD 13,000, he would realise a capital gain of AUD 1,000 (AUD 13,000 – AUD 12,000), which would be subject to CGT.
Record Keeping for Yield Farming: Accurate record-keeping is crucial for managing your tax obligations related to yield farming. The ATO requires detailed records of all crypto transactions, including:
- Dates of transactions
- Values in Australian dollars
- What the transaction was for
- Who the other party was (even if it’s just their crypto address)
Maintaining thorough records will help you accurately report your income and calculate any capital gains or losses.
Challenges in Yield Farming Taxation
Complexity of Transactions: Yield farming often involves multiple transactions and can be complex. For example, when you provide liquidity to a pool, you may receive liquidity pool tokens in return. The ATO may view this as a crypto-to-crypto swap, potentially triggering a CGT event.
Frequent Trading: The frequent trading nature of yield farming can make it challenging to track all transactions accurately. This is particularly important as the ATO has increased its focus on cryptocurrency compliance.
Valuation Issues: Determining the fair market value of tokens at the time of receipt can be challenging, especially for newer or less liquid tokens. It’s important to use reliable sources for valuation and maintain consistent methods.
Strategies for Tax-Efficient Yield Farming
Hold for Long-Term Gains: If you hold your crypto assets for more than 12 months before disposing of them, you may be eligible for the 50% CGT discount. This can significantly reduce your tax liability on capital gains.
Consult with a Tax Professional: Given the complexity of yield farming and its tax implications, it’s advisable to consult with a tax professional who specialises in cryptocurrency. They can provide personalised advice based on your specific situation and help ensure compliance with ATO regulations.
Future of DeFi Taxation in Australia
As DeFi and yield farming continue to evolve, it’s likely that the ATO will provide more specific guidance on their tax treatment. The ATO has shown increased interest in cryptocurrency transactions, and it’s important for yield farmers to stay informed about any changes in tax regulations.
Conclusion
Yield farming can be a profitable strategy for cryptocurrency investors, but it’s crucial to understand and manage the tax implications. Yield farming rewards are generally subject to Income Tax, while disposing of crypto assets may trigger Capital Gains Tax events. By keeping accurate records, understanding the tax rules, and potentially seeking professional advice, yield farmers can navigate the complex world of DeFi taxation and stay compliant with ATO regulations.
Remember, tax laws and regulations can change, so it’s essential to stay updated with the latest guidance from the ATO and consult with a qualified tax professional for personalised advice on your yield farming activities.