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

With decentralized finance (DeFi) transforming how Canadians earn passive income, understanding tax obligations is crucial. The Canada Revenue Agency (CRA) treats most DeFi earnings as taxable income, requiring accurate reporting. This guide breaks down everything you need to know about reporting DeFi yield in Canada—from CRA classifications to step-by-step filing processes—to keep you compliant and avoid penalties.

## Understanding DeFi Yield and Canadian Tax Rules
DeFi yield refers to rewards earned through decentralized protocols, including staking rewards, liquidity mining incentives, lending interest, and governance tokens. Unlike traditional investments, these aren’t automatically reported to the CRA, placing responsibility on taxpayers. In Canada:
– DeFi yield is typically classified as **income** (not capital gains) since it’s earned through active participation.
– Taxation occurs upon receipt based on the fair market value in CAD at that moment.
– Failure to report can trigger audits, penalties (50% of unpaid tax), or interest charges.

## How the CRA Classifies DeFi Earnings
Canadian tax treatment hinges on activity type and frequency:
1. **Income from Property**: Passive earnings (e.g., crypto lending interest) reported on Line 12100 of your T1 return.
2. **Business Income**: Frequent, systematic activities (e.g., daily liquidity mining) treated as self-employment income using Form T2125.
3. **Other Income**: Unique cases like airdrops or hard forks reported on Line 13000.
The CRA uses the “secondary income” doctrine—if earning yield is your primary goal, it’s likely taxable income.

## Step-by-Step Guide to Reporting DeFi Yield
Follow this process for accurate tax filing:
1. **Track All Transactions**: Log dates, yield amounts, and CAD values at receipt using tools like Koinly or CoinTracker.
2. **Convert to CAD**: Calculate yield value using exchange rates from the time of receipt (Bank of Canada or reputable exchanges).
3. **Categorize Earnings**: Determine if yield qualifies as property income, business income, or other.
4. **Report on Your Return**:
– Property income: T1 Line 12100
– Business income: Form T2125 with gross receipts
– Other income: T1 Line 13000
5. **Retain Records**: Keep transaction logs, wallet addresses, and calculations for 6 years.

## Record-Keeping Best Practices for DeFi Investors
Maintain these records to simplify reporting and withstand CRA scrutiny:
– Wallet addresses and transaction IDs for all yield receipts
– Screenshots or CSV exports from DeFi platforms (e.g., Uniswap, Aave)
– Dated CAD conversion records using sources like CoinGecko
– Notes on yield sources (e.g., “Compound USDC interest, June 15”)
Recommended tools: Crypto tax software (Koinly), Excel templates, or blockchain explorers like Etherscan.

## Common DeFi Tax Reporting Mistakes to Avoid
Steer clear of these errors:
– **Misclassifying as capital gains**: Yield is usually income—only token appreciation qualifies as capital gains.
– **Ignoring small yields**: All earnings, even under $100, must be reported.
– **Using year-end exchange rates**: CAD value must reflect receipt date, not December 31.
– **Poor documentation**: Incomplete records complicate audits.
– **Omitting foreign platforms**: Yield from global protocols (e.g., PancakeSwap) is still taxable in Canada.

## Frequently Asked Questions (FAQ)
**Q: Is DeFi yield taxable if I reinvest it?**
A: Yes. Taxation occurs when you receive tokens, regardless of whether you hold or reinvest them.

**Q: How do I report yield from multiple DeFi platforms?**
A: Aggregate all earnings under the appropriate income category (e.g., total property income on Line 12100).

**Q: What if I lost money in DeFi? Can I deduct losses?**
A: Only if classified as business income. Capital losses apply to token value declines, not yield activities.

**Q: Do I pay tax on unrealized DeFi yield?**
A: No—only when tokens are received or sold. Future price changes affect capital gains/losses upon disposal.

**Q: Can the CRA track my DeFi earnings?**
A: While challenging, they use blockchain analytics and exchange data. Non-reporting risks penalties up to 200% of owed tax.

Accurate DeFi yield reporting protects you from CRA penalties and ensures compliance. For complex cases—especially business income classification—consult a crypto-savvy Canadian accountant. Stay proactive: Track transactions monthly, use tax software, and file diligently to maximize your DeFi returns while meeting obligations.