How to Report DeFi Yield in Canada: Your Complete Tax Guide

Understanding DeFi Yield and Canadian Tax Obligations

Decentralized Finance (DeFi) yield—earned through staking, liquidity mining, lending, or farming—represents a revolutionary income stream in crypto. But in Canada, this innovation comes with tax responsibilities. The Canada Revenue Agency (CRA) treats DeFi yield as taxable income, regardless of whether you receive it in crypto or fiat. Failure to report can lead to penalties, interest charges, or audits. Unlike traditional investments, DeFi’s complexity demands meticulous tracking, as yields are considered “other income” or “business income” based on your activity frequency and intent.

How to Report DeFi Yield on Your Canadian Tax Return

Reporting DeFi yield involves precise steps to ensure CRA compliance. Follow this process:

1. Track All Yield Events: Record every instance of yield received (e.g., staking rewards, LP tokens), including dates, amounts in cryptocurrency, and equivalent CAD value at receipt time.
2. Classify Income Type: Determine if yields qualify as “other income” (occasional activity) or “business income” (frequent, profit-driven). Most passive investors report under “other income.”
3. Convert to CAD: Use Bank of Canada exchange rates or credible crypto data sources (e.g., CoinGecko) for CAD conversion at time of receipt.
4. Report on Tax Forms:
   • For other income: Enter total annual yield on Line 13000 of your T1 General form.
   • For business income: File Form T2125 detailing revenue and expenses.
5. Document Everything: Maintain records for six years, including transaction IDs and wallet addresses.

Key Considerations for Accurate Reporting

Navigating DeFi taxes requires attention to these critical factors:

• Cost Basis Tracking: When selling crypto obtained via yield, your cost basis is its CAD value at receipt. This affects future capital gains calculations.
• Business vs. Hobby Distinction: The CRA may classify frequent trading or complex strategies as business income, subject to higher scrutiny and potential deductions for expenses (e.g., gas fees).
• Reinvested Yield: Even if rewards are automatically compounded, they’re taxable upon receipt—similar to dividend reinvestment plans.
• Penalties: Unreported income can incur fines of 5–10% of owed tax plus daily interest. Voluntary disclosures may reduce penalties.

Tools and Resources to Simplify DeFi Tax Reporting

Leverage these tools for efficient compliance:

• Tax Software: Platforms like Koinly, CoinTracker, or ZenLedger auto-import DeFi transactions, calculate CAD values, and generate CRA-ready reports.
• CRA Guidance: Review the agency’s cryptocurrency FAQ for official rules.
• Professional Help: Consult crypto-savvy accountants for complex cases, especially involving multi-chain activities or business income.
• Blockchain Explorers: Use Etherscan or BscScan to verify transaction histories for audits.

Frequently Asked Questions (FAQ)

Q1: Is all DeFi yield taxable in Canada?
A: Yes. Staking rewards, liquidity mining payouts, and lending interest are all considered taxable income by the CRA upon receipt.

Q2: How do I handle yield paid in obscure tokens?
A: Convert the token’s value to CAD using its market price at receipt time. If no direct CAD pair exists, use BTC or ETH as an intermediate conversion step.

Q3: Can I deduct DeFi transaction fees?
A: Only if classified as business income. For “other income,” fees aren’t deductible, but they can adjust cost basis when selling the asset later.

Q4: What if I use a foreign DeFi platform?
A: Reporting rules remain the same. Track yields in CAD and disclose them on your Canadian return. Foreign platforms don’t issue T5 slips for crypto income.

Q5: How does the CRA know about my DeFi activity?
A: While not all transactions are monitored, the CRA uses blockchain analytics and international data sharing. Non-compliance risks penalties if discovered via audits or third-party reports.

Q6: Are stablecoin yields treated differently?
A: No—yields from stablecoins (e.g., USDC rewards) follow the same income reporting rules, converted to CAD at receipt.