DeFi Taxes: What Actually Gets Taxed (And What Doesn't)

DeFi makes crypto taxes roughly ten times harder. Every swap, every pool entry, every reward claim is a potential tax event — and most tax software struggles to categorise them correctly.

Here's a practical breakdown of what actually gets taxed in DeFi, and what doesn't.

Token swaps — yes, taxable

Every time you swap one token for another on a decentralised exchange, that's a disposal for tax purposes. It doesn't matter that you never touched fiat. Swapping ETH for USDC, or USDC for a governance token — each one triggers a capital gains calculation.

The gain or loss is based on the difference between what you originally paid for the token and its market value at the time of the swap.

Liquidity pool deposits and withdrawals

This is where it gets complicated. Depositing tokens into a liquidity pool may or may not be a taxable event, depending on your jurisdiction and the specific mechanics of the pool.

In many cases, if you receive LP tokens in return, that deposit is treated as a swap — you disposed of your original tokens and received LP tokens. When you withdraw, it happens again in reverse.

The net effect can be significant, especially if the underlying token prices moved while you were providing liquidity.

Staking rewards — income when received

When you earn staking rewards, most tax authorities treat this as income. You owe income tax on the fair market value of the tokens at the moment you receive them.

Later, when you sell those tokens, you also owe capital gains tax on any increase in value since you received them. Yes, that means staking rewards get taxed twice — once as income, once as capital gains.

Yield farming — double taxation applies

Similar to staking, yield farming rewards are generally treated as income when you receive them. The underlying tokens in the farm may also generate capital gains when you exit the position.

The complexity here is tracking cost basis across multiple reward distributions, compounding positions, and token price changes.

Wrapping and unwrapping tokens

Converting ETH to WETH, or BTC to WBTC — is this taxable? It depends on where you live.

Some jurisdictions treat wrapping as a like-for-like transfer with no tax implications. Others treat it as a disposal and acquisition of a new asset. The UK's HMRC hasn't issued specific guidance on this, which means it's a grey area that should be handled carefully.

Airdrops — income on receipt

When you receive an airdrop, most tax authorities treat it as income at the market value when it hits your wallet. If you later sell the airdropped tokens for more than that value, you also owe capital gains tax on the difference.

If you receive an airdrop for a token with no market value, the income is effectively zero — but you should still record it for when you eventually sell.

What's NOT taxable

A few things that generally don't trigger tax events:

• Moving tokens between your own wallets — transferring ETH from MetaMask to Ledger isn't a disposal
• Failed transactions — if a transaction reverts, nothing happened (though you still lost the gas fee)
• Holding — simply holding tokens in a DeFi protocol without receiving rewards is not a taxable event

Important caveat

These are general principles. Tax rules vary significantly by country, and DeFi-specific guidance is still evolving in most jurisdictions. What applies in the UK doesn't necessarily apply in the US, Canada, or Australia.

DeFi taxes are genuinely a headache. We reconcile all of it — every swap, every pool, every reward claim — and deliver a report that actually makes sense. Get a quote and let us handle it.