- Understanding DeFi Yield Taxation in India
- Step-by-Step Guide to Reporting DeFi Earnings
- Essential Record-Keeping Practices
- Penalties for Non-Compliance
- Frequently Asked Questions (FAQs)
- Is DeFi yield taxed differently from other crypto income?
- How do I value yield paid in obscure tokens?
- Can losses from impermanent loss offset DeFi taxes?
- Do I need to report if yield is reinvested?
- Are there TDS requirements for DeFi?
- Staying Compliant in 2023
Understanding DeFi Yield Taxation in India
Decentralized Finance (DeFi) yield – earned through staking, liquidity mining, or lending – is taxable income in India. Under Section 2(24) of the Income Tax Act, all crypto earnings including DeFi rewards qualify as “Income from Other Sources”. The Indian government mandates reporting these earnings in your annual Income Tax Return (ITR), with failure to disclose risking penalties up to 50% of evaded tax plus interest. As regulatory clarity evolves, taxpayers must track yields in real-time using blockchain explorers like Etherscan and convert values to INR using exchange rates on transaction dates.
Step-by-Step Guide to Reporting DeFi Earnings
- Track All Yield Transactions: Document dates, token amounts, and platforms (e.g., Uniswap, Aave) using crypto tax software like KoinX or CoinTracker
- Convert to INR Value: Calculate fair market value in rupees at the time of receipt using historical exchange rates from CoinMarketCap
- Categorize Income Type: Classify as:
- Regular income (if held <3 years)
- Capital gains (if held >3 years at 20% with indexation)
- File Under Correct ITR Form: Use ITR-2 or ITR-3 depending on income sources
- Pay Advance Tax: Quarterly installments if tax liability exceeds ₹10,000/year
Essential Record-Keeping Practices
Maintain these records for 6 years:
- Wallet addresses and transaction IDs
- Screenshots of DeFi platform dashboards
- CSV exports from exchanges showing INR conversions
- Receipts of tax payments
Penalties for Non-Compliance
Failure to report DeFi yield may trigger:
- ₹10,000 penalty under Section 271F for missed filing
- 200% penalty on unpaid tax if concealed intentionally
- Prosecution with possible imprisonment under Section 276C
Frequently Asked Questions (FAQs)
Is DeFi yield taxed differently from other crypto income?
No – all crypto earnings follow the same tax framework. DeFi rewards are taxed as ordinary income at your slab rate when received.
How do I value yield paid in obscure tokens?
Use the token’s highest price across Indian exchanges on receipt date. If unavailable, reference global USD prices converted to INR.
Can losses from impermanent loss offset DeFi taxes?
Yes, liquidity pool losses are deductible against capital gains but not against regular income from yield.
Do I need to report if yield is reinvested?
Yes – taxation occurs upon receipt, regardless of reinvestment. Each reinvestment creates a new cost basis.
Are there TDS requirements for DeFi?
Currently no TDS applies to DeFi transactions, but 1% TDS on crypto transfers may impact yield movement between wallets.
Staying Compliant in 2023
With India’s crypto tax laws maturing, meticulous reporting of DeFi yield is non-negotiable. Use automated tax tools to simplify tracking, consult a chartered accountant specializing in crypto, and file before July 31st deadlines. Proactive compliance avoids legal risks while legitimizing your DeFi participation.
