KoinlyticsThis is not tax advice. DeFi and staking tax rules vary by jurisdiction, are unsettled in several areas even within one jurisdiction, and change often, so check current guidance before filing.
Why this is the hard part
Basic buy-sell-trade taxation is covered in crypto taxes basics: property, disposals, cost basis. DeFi breaks that model because the taxable event is often not a clean sale. Depositing into a pool, watching a balance grow through rebasing, or getting liquidated by a protocol you never manually interacted with: none of these map cleanly onto you sold an asset. Tax authorities have been slow to issue specific guidance, and where guidance exists it often does not answer the DeFi-specific question directly. Treat everything below as the current best reading, not settled law, and expect it to keep moving.
Adding and removing liquidity: a disposal or not
When you deposit two tokens into a liquidity pool, you receive an LP token representing your share. Whether that deposit itself is a taxable disposal of the underlying tokens depends on which side of an unresolved argument your jurisdiction or preparer lands on. One view: you exchanged property, your original tokens, for different property, the LP token, which is a crypto-to-crypto trade and therefore a disposal, the same as swapping ETH for USDC. The opposing view: the LP token is a receipt evidencing continued beneficial ownership of a claim on the pool, not a change in economic ownership, so no disposal occurs until you actually exit. Neither the IRS nor HMRC has issued a clean, DeFi-specific ruling settling this for every pool design, and the two views can produce very different tax bills in a year where the underlying tokens moved a lot between deposit and withdrawal. HMRC's published guidance leans toward economic substance: whether you retain a claim to the same tokens, or they are pooled and mixed such that you get back a variable basket. That is a facts-and-circumstances test, not a bright line. Get a position from a specialist familiar with the specific pool design before assuming either answer applies to you.
Impermanent loss is not a tax loss until you exit
Impermanent loss is the gap between what your LP position is worth and what simply holding the two tokens would have been worth, caused by the pool automatically rebalancing as prices move. It is unrealized by definition: nothing has been sold, so there is nothing to deduct. It only becomes real, and only becomes a tax event, at the moment you remove liquidity and dispose of the LP token, and even then it does not appear on any tax form as a separate line item. It is baked into the difference between your cost basis going in and your proceeds coming out. See impermanent loss explained for the mechanics, and the impermanent loss calculator to estimate the gap before deciding whether the eventual tax treatment even changes your decision to LP.
Staking rewards, and why token design changes the answer
In the US, Revenue Ruling 2023-14 treats staking rewards as ordinary income at fair market value the moment the taxpayer has dominion and control over them, meaning the reward is claimable or already sitting in a wallet the taxpayer controls, with that value becoming the new cost basis for the reward tokens. This resolved what had been an open question about whether staking income is taxed on receipt or only on later sale, at least for direct staking.
The token design of the staking derivative changes how often that income-recognition question comes up in practice. A rebasing token, where your wallet balance itself increases periodically to reflect rewards, arguably creates a new taxable receipt event at every rebase, since new units appear under your control on a schedule. A value-accruing, non-rebasing token instead keeps your balance constant and lets the exchange rate against the underlying asset rise, so the reward sits in unrealized price appreciation rather than in discrete new units landing in your wallet. Lido's stETH and wstETH are the clearest example: stETH rebases, so each rebase is a candidate taxable event under the dominion-and-control logic; wstETH is a wrapped, non-rebasing version where the same reward shows up as a rising exchange rate rather than a growing balance. Which produces the cleaner outcome, many small taxable events versus one calculation on eventual disposal, is genuinely unsettled and depends on how aggressively a jurisdiction wants to treat each rebase as income. This is part of why some holders choose the non-rebasing version for reasons that have nothing to do with yield and everything to do with recordkeeping.
Lending interest
Interest earned by supplying assets to a lending market is the least contested case here: ordinary income at fair market value when credited, in most jurisdictions, the same as staking rewards or a savings account. The complexity in lending shows up on the other side of the transaction, not this one.
Borrowing is not a disposal, liquidation is
Taking a loan against crypto collateral is not a disposal under mainstream guidance: you still own the collateral, and receiving borrowed cash or stablecoins is debt, not a sale. This is a large part of why crypto-backed borrowing is popular among holders who want liquidity without triggering a gain on an appreciated position. Liquidation flips that entirely. When a protocol force-sells your collateral to repay a loan because it breached a health threshold, that is a disposal like any other, and you owe capital gains tax on the difference between the liquidation price and your original cost basis if the position was in profit, even though you never chose to sell and it typically happens at the worst point in a crash.
Airdrops and points
US guidance under Revenue Ruling 2019-24 treats an airdropped token as ordinary income at fair market value when received, with that value becoming the new cost basis. Points programs before any token launch are murkier: points themselves are usually not taxable when they accrue because they are typically not transferable property with an observable market value at that stage. Once points convert into a token at a generation event, that conversion is generally treated the same as any other airdrop: ordinary income at fair market value on the day the token becomes claimable. See how airdrops actually work for the eligibility and distribution mechanics that determine when received actually happens.
Wrapping and bridging
Wrapping ETH into WETH, or bridging USDC from one chain to another, raises the same underlying question as LP deposits: is exchanging one token for a different but economically equivalent one a disposal. The case for no is that the wrapped or bridged asset is a 1:1 claim on the same underlying value with no change in economic position. The case for yes is that, strictly, you exchanged one distinct piece of property for another, and if a tax authority treats every contract address as distinct property, that is a taxable exchange regardless of the peg. Most preparers treat simple, same-chain wrapping like ETH to WETH as non-taxable in practice, but there is no explicit ruling confirming that in most jurisdictions, so it remains a judgment call rather than settled law. Cross-chain bridging is less settled still, because the asset received on the destination chain is often a synthetic representation issued by a different bridge, arguably different property from what was deposited, not merely the same asset on a different network.
Gas fees: cost basis addition or deductible expense
Gas paid to execute a taxable transaction, a swap, an LP exit, a reward claim, generally adds to the cost basis of what you acquired or reduces the proceeds of what you disposed of, the same way a brokerage commission adjusts basis for a stock trade. Gas paid for an action with no taxable event attached, like a token approval, has no clean home in most guidance and is typically treated as a non-deductible personal expense for retail users in the US, since there is no business connection to attach it to. That changes if you are classified as trading as a business rather than as an individual investor, a separate determination with its own threshold and its own jurisdiction-specific rules.
Practical steps
- Decide, with a specialist, how your jurisdiction treats LP deposits and withdrawals before LPing at meaningful size, since the disposal question changes the entire tax picture.
- Do not look for a deductible impermanent loss line item: the effect only shows up in cost basis math when you exit the pool.
- Separate rebasing reward tokens from non-rebasing wrapped versions in your records, since they may carry different taxable-event frequency.
- Track liquidations as disposals the moment they happen, not when you notice the position is gone.
- Record which gas fees attached to a taxable transaction versus a non-taxable one, since only the former clearly adjusts cost basis.
- Koinlytics tracks LP positions, staking balances, and realized P&L across chains, which helps line up when a disposal happened, though it does not determine tax treatment or file anything.