Yield farming rewards are taxable income in the US. Learn how the IRS treats DeFi rewards, what to track, how to calculate taxes, and how to avoid penalties with simple, actionable steps.
Yield Farming Taxes: What You Owe and How to Track It
When you earn tokens from yield farming, a DeFi practice where you lock crypto in liquidity pools to earn rewards. Also known as liquidity mining, it’s one of the most popular ways to make money in crypto—but it’s also one of the most misunderstood when it comes to taxes. The IRS and other tax agencies treat these rewards as income the moment you receive them, not when you sell. That means every time you get paid in ETH, USDC, or a new token from a pool, you owe tax on its dollar value at that exact moment. It doesn’t matter if you never cash out. You still owe tax.
This isn’t just about big gains. Even small rewards from a liquidity pool, a smart contract that holds paired crypto assets to enable trading on decentralized exchanges add up fast. If you’re farming on Uniswap, PancakeSwap, or even niche platforms like DeepBook Protocol, each claim triggers a taxable event. And if you get airdropped tokens—like the WINGS airdrop, a token reward from JetSwap.finance tied to yield farming activity—that’s also income. No official announcement? Doesn’t matter. If you received it, the IRS knows you did.
Most people think crypto taxes only apply when they sell. That’s the biggest mistake. You’re taxed on yield farming taxes as you earn, not when you cash out. And if you swap one token for another to keep farming? That’s a taxable trade too. You’re selling one asset to buy another, and the difference in value creates a capital gain or loss. Tracking this manually is a nightmare. You need to record the date, amount, and USD value of every reward, every swap, every fee paid in crypto.
That’s why so many who started farming in 2020 and 2021 are now facing audits. Projects like Elemon, Wombex, and Vodra gave out tokens through CoinMarketCap campaigns—but none of those were tax-free gifts. Each token had a market value the second it hit your wallet. Even if the token later crashed to pennies, you still owe tax on what it was worth when you got it.
There’s no way around it: if you’re farming, you’re earning income. The only question is whether you’re ready to report it. Tools exist to help, but they won’t fix bad records. Start now. Save your transaction history. Know what you earned. And don’t assume a project’s website or airdrop page told you the truth about taxes—they rarely do.
Below, you’ll find real breakdowns of DeFi campaigns, token rewards, and exchange behaviors that directly impact your tax bill. Some posts show you how to spot fake airdrops. Others explain how liquidity pools work under the hood. All of them help you understand what you actually owe—and how to prove it.
