DeFi tax in Australia: yield farming, lending, and protocol income
Decentralised finance (DeFi) activities can generate income and capital gains through multiple simultaneous mechanisms. The ATO has begun issuing guidance, but many DeFi-specific scenarios remain uncertain. This guide explains the general principles that apply to common DeFi activities.
Estimator coverage notice
This estimator does not currently support DeFi activities including yield farming, lending, and liquidity provision. This page explains the general ATO treatment for educational purposes only. If your crypto activity involves DeFi protocols, use this page as background reading and consult a tax professional for your specific situation. See the coverage page for a full list of what this estimator does and does not support.
How the ATO treats DeFi activities
DeFi activities can trigger both ordinary income and CGT events, sometimes in the same transaction. Yield farming rewards are generally ordinary income at market value on receipt. Wrapping a token (e.g., ETH to WETH) may or may not be a CGT event depending on whether it is treated as a disposal. Lending crypto and receiving interest creates ordinary income. Providing liquidity and receiving LP tokens may constitute a disposal of the underlying assets. The ATO's guidance is evolving, and many scenarios have no definitive ruling.
Worked example
You provide ETH and USDC to a liquidity pool and receive LP tokens in return. The ATO may treat the deposit as a disposal of your ETH and USDC at market value — a CGT event. While your funds are in the pool, you earn trading fees which may be ordinary income. When you withdraw, you receive ETH and USDC (potentially in a different ratio due to impermanent loss), which may be another CGT event on disposal of the LP tokens. Each step involves a separate tax calculation with uncertain treatment.
Common pitfalls
Impermanent loss has no clear ATO guidance — it is not currently recognised as a deductible loss until a disposal occurs. Token wrapping is similarly uncertain: the ATO has not confirmed whether wrapping constitutes a disposal. The complexity of DeFi means that a single protocol interaction can involve dozens of taxable events that are difficult to track manually. Record-keeping for DeFi is significantly more demanding than for simple spot trading.
Frequently asked questions
Are DeFi yields taxable in Australia?
Generally yes. Yield farming rewards, lending interest, and liquidity fees are typically treated as ordinary income at the market value on the date of receipt. However, the ATO has not issued comprehensive guidance on many DeFi-specific scenarios, so treatment can be uncertain.
How is yield farming taxed in Australia?
Yield farming rewards are generally treated as ordinary income at market value on receipt. Each token reward creates a new parcel at that cost base. When those tokens are later disposed of, a separate CGT event can arise. Wrapping tokens and providing liquidity may also be separate CGT events.
Tax Accuracy & Sources
General information about crypto tax in Australia for individual investors. Not tax advice.