Glossary

Yield farming

Yield farming is moving crypto between DeFi protocols to earn rewards, and each reward is ordinary income at its value on receipt while each move between protocols may be a taxable exchange.

How it works

Yield farming moves crypto between DeFi protocols to earn rewards. Each reward is ordinary income at its value on receipt, and each move between protocols may be a taxable exchange. Rewards paid in a protocol’s governance token are income even if the token is illiquid; selling it later is a second event measured against the income already reported as basis.

Why it matters

Farmers routinely owe tax on reward income in years the rewards later became worthless. Reporting the income and then the loss correctly is the only way to net them.

Related: liquidity pool, DeFi.

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Definitions are general information, not legal advice, and may not reflect the most recent changes in law.

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