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A crypto yield farm basically lets you deposit two crypto products at a certain ratio. As the ratio changes trades are done to keep them in line, of which the smart contract gives you a cut, usually in a governance token. So let's say for example:

  • On Jan. 1st you deposit 1BTC, and 10 ETH into the smart contract. Which you bought with $USD.
  • On Dec. 20th you "close" the smart contract, and end up withdrawing 1.1BTC and 9ETH due to the relative price change.
  • Over time, you've been paid 1000 "KQQ" in yeild.
  • You sell the 1.1 BTC, 9ETH, and 1000 KQQ for $USD.
  1. How would you report this series of transactions on your taxes?
  2. If instead you just sold the KQQ and kept the BTC/ETH, how would the change in "ratio" be handled on your taxes when you eventually close one or both of the positions?
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  • Tax questions require the country be specified. Commented Mar 18, 2022 at 14:28

1 Answer 1

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On Jan. 1st you deposit 1BTC, and 10 ETH into the smart contract. Which you bought with $XUSD.

Your basis is $X USD. Let's assume 1BTC=10ETH, so you have 1/2X basis for 1BTC and 0.05X basis for each of the 10ETH

On Dec. 20th you "close" the smart contract, and end up withdrawing 1.1BTC and 9ETH due to the relative price change.

You gained 0.1 BTC and you lost 1 ETH. You recognize the loss of 0.05X, which is what 1ETH was worth to you when you bought it. You recognize gain of 0.1BTC*the value of BTC on Dec. 20th as your gain. Let's say 1BTC=$YUSD on Dec. 20th - you recognized gain of 0.1Y.

Your current basis as of Dec 21st is now 0.5X+0.1Y for your 1.1BTC and 0.45X for your 9ETH

Over time, you've been paid 1000 "KQQ" in yeild.

Your basis in KQQ is the sum of values of each of these payments based on the KQQ's value when paid. Let's call it $ZUSD. Not sure whether these qualify as dividends? Maybe interest. Need to read the contract carefully.

You sell the 1.1 BTC, 9ETH, and 1000 KQQ for $USD.

Let's call the proceeds $AUSD.

You sold 0.5X+0.45X+0.1Y+Z and got A. Your gain/loss from the sale is A-(0.5X+0.45X+0.1Y+Z). The short or long category based on the holding periods of each.

How would you report this series of transactions on your taxes?

On Schedule D. If KQQ are qualified as dividends or interest - these go to Schedule B. Otherwise - misc income (line 8z on Schedule 1).

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  • Thank you for the response. So essentially if I close the entire position I am just reporting the net gain/loss as income, which makes sense. I am still wondering what happens though if for example, if I sell just the KQQ, when the gains/losses to the underlying BTC/ETH quantities gets realized and how they are reported. Also about "reading the contract carefully" it's just code. I am not sure how that would help categorizing them as dividends or not.
    – Chuu
    Commented Mar 20, 2022 at 17:09
  • @Chuu doesn't matter what language the contract is written in, what matters is what it provides. As I said, you have separate basis in each type of the investment, so you can calculate your gain from just selling the KQQ just as well (whatever you sell it for minus $ Z).
    – littleadv
    Commented Mar 20, 2022 at 18:48

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