How it works
DeFi protocols replace intermediaries with smart contracts: decentralized exchanges for swaps, lending protocols for interest, liquidity pools for market making, and staking and yield programs for rewards. The IRS has issued almost no DeFi-specific guidance, so each transaction is analyzed under general property rules: a swap is a sale, interest and rewards are income, and deposits into pools may or may not be dispositions depending on what you receive.
Why it matters
DeFi is fully traceable on chain, no exchange reports it, and most software mislabels it. It is the most common source of reconciliation work and the area where a documented position on unsettled questions matters most.
Related: liquidity pool, yield farming, wrapped token. Read more: the DeFi tax guide.
