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Tax Implications of Crypto Staking, DeFi, and Yield Farming

By June 6, 20237 minute read
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

The cryptocurrency world has witnessed rapid popularity, with various innovative concepts emerging to revolutionize traditional financial systems. Among these concepts are crypto staking, yield farming, and decentralized finance (DeFi), which offer unique opportunities for investors to earn rewards and actively participate in the growth of blockchain networks.

However, along with the potential benefits, there are significant tax implications that investors need to consider. In this blog, we will explore the tax implications of crypto staking, yield farming, and DeFi, highlighting the benefits, risks, and taxation guidelines associated with each of these activities. Understanding the tax aspects of these emerging trends is crucial for investors to navigate cryptocurrency while ensuring compliance with tax regulations.

What is Crypto Staking?

Crypto staking is a process in which cryptocurrency holders participate in validating and securing a blockchain network by locking up their funds and earning rewards in return. It is a mechanism that helps maintain the integrity and efficiency of blockchain networks, particularly those that utilize Proof of Stake (PoS) algorithms.

In return for their contribution, validators receive staking rewards, which are typically a portion of the transaction fees or newly minted tokens generated by the network. However, staking is not without risks. Validators may face penalties or have their staked tokens slashed if they behave maliciously or fail to meet certain network requirements. 

What are the benefits of crypto staking?

  • Passive Income: Crypto staking provides an opportunity to earn passive income by holding and staking cryptocurrencies. 
  • Network Security: Stakers are vested in maintaining the network’s integrity, as their staked assets serve as collateral, incentivizing them to act honestly and in the network’s best interest. 
  • Alignment with a long-term vision: Staking encourages a long-term perspective, as stakers commit their funds for a certain period.

What are the risks involved in crypto staking?

  • Price volatility: The value of staked cryptocurrencies can fluctuate significantly, which can impact the overall profitability of staking. If the value of the staked tokens decreases, stakers may experience a loss.
  • Penalties: Stakers face the risk of penalties or having their staked tokens slashed if they act with malicious intentions or fail to meet certain network requirements. 
  • Vesting period: The vesting or lock-in period for staked assets can be for weeks or months. During this time, stakers are unable to sell or transfer these tokens to anyone else. Staking is a longer-term commitment than simply holding the asset.

How are staking returns computed?

The percentage of return provided by a validator each year APR (Annual Percentage Rate) determines profits from staking.

Assume you wish to stake 100 BTC to a validator that offers a 10% APR. Every year, you will receive 10% interest on your asset. This means that after one year, your net asset will be 100+(100×10%) = 110. This implies you will receive 10÷12 months = 0.833% interest per month. 

What are the taxations concerning staking rewards/income?

  • In the Union Budget 2022, the government introduced a flat tax of 30% on the income generated through VDAs (cryptocurrency/NFTs). Additionally, a TDS of 1% will be deducted on the transfer of any VDA.
  • However, the income generated through crypto staking is taxed as per individual slab rates.  

For example, Mr. A is a salaried individual with a total taxable income of ₹20,00,000 in the previous year, 2022-2023. Additionally, he has received staking rewards of 5 ETH worth ₹7,50,000. Will the staking rewards be taxed at 30%? 

NO – The staking rewards will be taxed as per the slab rates applicable to Mr. A. Additionally, if Mr. A sells 5 ETH for ₹10,00,000 in the future in such case tax of 30% will be levied on gains of ₹2,50,000. 

What is Decentralised Finance (DeFi)?

Defi is an emerging financial technology built on public blockchains, and it is based on secure distributed ledgers similar to those used by cryptocurrencies. Defi’s core basis is that no centralized authority can dictate or control operations.

In India, RBI, SEBI, and Central Government authorities define the rules for centralized financial statements like banks and brokerages, which consumers rely on to access capital and financial services directly. With Defi, there is no central authority. Instead, authority is distributed in a decentralized approach that is intended to provide more power and control to individuals with peer-to-peer (P2P) digital exchanges. 

What are the use cases in DeFi?

  • Payments: Defi can enable P2P payments without the need for a central authority. 
  • Lending: The ability to lend and borrow cryptocurrency assets is a common use case for Defi. 
  • Stablecoins: An increasingly common use of Defi is stablecoins. The purpose of a stablecoin is to help limit the volatility of cryptocurrency by pegging the value of a coin to another asset. 
  • Yield farming: For users who use Defi as an investment vehicle, yield farming enables individuals to gain interest income.

What are the benefits of DeFi?

Access beyond boundaries: Decentralised applications allow users to transfer capital worldwide.

  • Low fees and high-interest rates: Defi enables parties to negotiate interest rates and directly lend money via Defi networks.
  • High level of security: Smart contracts are published on a blockchain, and records of completed transactions are available for anyone to review but do not reveal your money.
  • Autonomy: Defi platforms don’t rely on any centralized financial institutions and are not subject to adversity or bankruptcy. The decentralized nature of Defi protocols mitigates much of the risk.

What are the risks involved in DeFi?

  • Complexity: The perceived complexity of DeFi is likely the model’s biggest challenge. Defi works in a P2P model with smart contracts and algorithms that can be difficult to understand for the uninitiated fully.
  • The threat of hackers: All the potential use cases of DeFi rely on software systems that are vulnerable to hackers.
  • Customer service: Without a central authority, customer service with DeFi can often be a challenge.

What is the taxation concerning DeFi transactions?

  • The Income Tax Department has not released specific guidance on Defi transactions. Instead, we need to refer to the existing provisions of the Act for guidance. The following transactions may be taxed at your tax rate upon receipt:
    • Earning new liquidity mining tokens;
    • Referral rewards;
    • Play to earn income.

The users who are often involved in P2P transactions of decentralized exchanges shall take note of the following TDS implications:

  • As per Section 194S of the Income Tax Act, tax @ 1% will be deducted on any Virtual Digital Asset (crypto/NFTs) transfer. The authorities have mandated that Indian exchanges comply with TDS provisions in every transaction.
  • However, the scenario changes if an Indian resident enters into a transaction at a place other than the Indian exchange; the burden of TDS compliance, including deduction and deposit of TDS amount with the government will be on such Indian residents.
  • Nonetheless, TDS liability arises when the payment for the transaction exceeds ₹50,000 during a financial year in the case of specified people and ₹10,000 in other cases.

What are the different scenarios of DeFi?

  1. If I am entering into a P2P transaction on an Indian exchange like WazirX, do I need to deduct TDS? 

No, when trading is done on an Indian exchange like WazirX, all the compliances regarding TDS are done by the exchange itself. 

  1. If I am entering into a P2P transaction on an exchange other than an Indian exchange, do I need to deduct tax as TDS? 

Yes, you are required to deduct tax as TDS, deposit it with the Government, and file respective forms. 

What is Yield Farming?

Yield farming, also known as liquidity mining, is a concept within the decentralized finance (DeFi) ecosystem that allows individuals to earn rewards by providing liquidity to various protocols and platforms.

The process of yield farming involves interacting with different DeFi platforms and protocols that offer yield farming programs. These programs often have specific rules and requirements, such as locking up a certain amount of funds for a defined period or participating in specific liquidity pools.

What are its benefits?

  • Increased returns: Yield farming offers the potential for higher returns compared to traditional investment avenues.
  • Diversification of assets: Yield farming allows users to diversify holdings across different protocols and projects. By spreading their investments, they can potentially hedge their risk exposure. 
  • Participation in emerging projects: Yield farming provides an opportunity to actively engage with and support emerging DeFi projects. By contributing liquidity, individuals become active participants in the growth and success of these platforms.

What are the risks involved?

  • Impermanent Loss: It is a loss that occurs when the value of the deposited assets in a liquidity pool diverges significantly from their original value. This can happen due to price volatility or changes in demand for specific assets. 
  • Smart contract risks: Smart contracts contain vulnerabilities and are often subject to hacking attempts. If a smart contract is compromised, individuals may risk losing their deposited assets, including both the original investment and any earned rewards.

What is the taxation concerning Yield Farming?

The tax applicability is similar to the one explained in Defi, as yield farming or liquidity mining is a part of Defi. Therefore, the investor’s returns in terms of cryptocurrencies through yield farming will be subject to individual slab rates.

However, if such cryptocurrencies are sold in the future, then gains will be taxable @ 30% without any set-off and carry forward of losses.


In conclusion, as the world of cryptocurrency continues to evolve, investors need to understand the tax implications associated with crypto staking, yield farming, and decentralized finance (DeFi). These innovative concepts offer unique opportunities for earning rewards and participating in the growth of blockchain networks.
However, investors must navigate the complexities of taxation to ensure compliance with tax regulations. Use TaxNodes to generate accurate reports that will not only help you file your taxes efficiently but will also help you save a lot of money.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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