Crypto DeFi Yield Farming Tax Guide for Liquidity Mining (2026)
Report DeFi yield farming income: LP token taxation, reward income, impermanent loss, and liquidity pool tax treatment for DeFi protocol participants.
Summary
DeFi yield farming creates multiple taxable events. This guide explains LP tokens, reward income, impermanent loss, and pool tax treatment.
Key Steps
- 1Track reward tokens: yield farming rewards taxable as ordinary income at FMV.
- 2Document LP provision: adding liquidity creates token swap, taxable event.
- 3Calculate impermanent loss: realized when liquidity withdrawn, capital gain/loss.
- 4Monitor pool composition: track token ratio changes for accurate basis.
- 5Use DeFi tax tools: specialized software for complex protocol transactions.