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

## Introduction: Navigating DeFi Taxes in Canada
DeFi yield—earned through staking, liquidity mining, lending, or other decentralized finance activities—isn’t just free crypto. The Canada Revenue Agency (CRA) treats it as taxable income. With crypto audits rising, understanding how to accurately report DeFi earnings is crucial to avoid penalties. This guide breaks down Canadian tax rules into actionable steps, helping you stay compliant while maximizing your returns.

## Understanding DeFi Yield and Canadian Tax Obligations
DeFi yield refers to rewards generated from participating in decentralized protocols. Common types include:
– Staking rewards (e.g., ETH 2.0 staking)
– Liquidity pool incentives (e.g., Uniswap LP tokens)
– Lending interest (e.g., Aave deposits)
– Yield farming bonuses

The CRA classifies cryptocurrency as property, not currency. Thus, all DeFi yield is taxable upon receipt, regardless of whether you cash it out. Failure to report can trigger audits, interest charges, and penalties of 5-10% of unpaid taxes plus 20% for gross negligence.

## How the CRA Classifies DeFi Income: Key Categories
### Business Income vs. Property Income
– **Business Income**: Applies if you actively trade or frequently generate yield (e.g., daily farming). Taxed at 100% of your marginal rate (up to 54% in Ontario).
– **Property Income**: For passive investors (e.g., occasional staking). Also fully taxable but may indicate lower audit risk.

### Capital Gains Implications
When you later sell or swap yield tokens (e.g., trading staked ETH), it triggers capital gains tax. Only 50% of gains are taxable. Example:
– You earn 0.1 ETH ($300 CAD) from staking → Report $300 as income.
– Later sell that ETH for $500 → Report $100 capital gain (50% of $200 profit).

## Step-by-Step: Reporting DeFi Yield on Your Tax Return
Follow this process for T1 filing:

1. **Track All Yield Transactions**
– Export CSV files from wallets/DeFi platforms (e.g., MetaMask, Ledger).
– Note dates, amounts, and token types for each reward.

2. **Convert to CAD Value**
– Use exchange rates at time of receipt (Bank of Canada daily rates preferred).
– Example: 100 USDC yield on Jan 15 = Convert using USD/CAD rate that day.

3. **Categorize Income Type**
– Property/Interest Income: Report on Line 12100.
– Business Income: Use Form T2125.
– Capital Gains: Report disposals on Schedule 3.

4. **Deduct Allowable Expenses**
– Gas fees, subscription costs for tracking tools, and professional advice fees may be deductible against DeFi income.

## Essential Record-Keeping Practices
Maintain these documents for 6+ years:
– Dated transaction histories from all DeFi platforms
– Screenshots of reward distributions
– CAD conversion calculations with rate sources
– Receipts for related expenses
– Wallet addresses used

Use crypto tax software (e.g., Koinly, CoinTracker) with CRA-compatible reports to automate tracking.

## Common Reporting Mistakes to Avoid
– **Ignoring Small Rewards**: Even $5 in yield must be reported.
– **Using Year-End Exchange Rates**: Always use rate at receipt date.
– **Forgetting Airdrops**: Free tokens from protocols are taxable income.
– **Mixing Personal/DeFi Wallets**: Creates tracing difficulties during audits.
– **Omitting Reinvested Yield**: Yield compounded in-protocol is still taxable when earned.

## DeFi Tax FAQ: Canada Edition
**Q: Is unstaking considered a taxable event?**
A: No—only the initial reward receipt and any subsequent disposal (selling/swapping) are taxable.

**Q: Can I offset DeFi losses against other income?**
A: Capital losses from token sales can offset capital gains. Business losses may reduce other income if CRA deems it business activity.

**Q: How does the CRA know about my DeFi earnings?**
A: Through crypto exchange reporting (since 2023), blockchain analysis, or audits. Non-compliance risks penalties up to 200% of taxes owed.

**Q: Are stablecoin yields taxed differently?**
A: No—all yield (even in stablecoins) is taxable at CAD value when received.

**Q: Do I need to file if I only earned $100 in DeFi yield?**
A: Yes. All crypto income must be reported regardless of amount.

## Final Tips for Compliance
Consult a crypto-savvy Canadian accountant if you have complex transactions. Use CRA’s crypto tax guide (T4012) for reference, and file using NETFILE for accuracy. Proactive reporting protects you from penalties and ensures your DeFi activities remain profitable long-term.