Canada DeFi Tax Guide 2025

CRA Treatment of DeFi

The CRA treats DeFi transactions like traditional crypto:

• Cryptocurrency = property (not currency)
• Token swaps = disposition + acquisition (barter transaction)
• Earning tokens = income (business or investment)
• Must track ACB for every token

Yield Farming & Liquidity Mining

Tax Treatment

Earning tokens = income, classified as:

Business Income (if regular/active):

• 100% taxable at marginal rate
• Can deduct business expenses (gas fees, research)
• No capital gains treatment
• May require HST/GST registration

Investment Income (if passive/occasional):

• 100% taxable at marginal rate
• Limited expense deductions
• Cost basis = income value
• Future sale = 50% capital gains inclusion

Business vs Investment

CRA considers these factors:

• Frequency: Daily farming likely business
• Time spent: Hours per day analyzing = business
• Knowledge: Expert knowledge = business
• Intent: Profit-seeking = business

Example: Yield Farming (Investment Income)

• March 2024: Provide liquidity to Uniswap
• June 2024: Claim 100 UNI worth CAD $800
• Investment income: $800
• ACB for UNI: $800
• December 2024: Sell for $1,200
• Capital gain: $1,200 - $800 = $400
• Taxable capital gain: $400 × 50% = $200

Providing Liquidity

Adding Liquidity

Not a disposition if you receive LP tokens:

• LP tokens = receipt for your deposit
• You maintain beneficial ownership
• No taxable event
• ACB transfers to LP tokens

Removing Liquidity

Disposition if token amounts change:

• Calculate gain/loss on each token
• Compare ACB to FMV received
• 50% inclusion rate applies

Impermanent Loss

Not deductible until realized:

• While providing liquidity: no deduction
• When withdrawing: capital loss is realized
• Apply 50% inclusion rate to loss

Example: Liquidity Pool

• Deposit: 1 ETH (ACB $3,000) + 3,000 USDC (ACB $3,000)
• Receive: 100 LP tokens
• Tax: $0 (not a disposition)
• LP token ACB: $6,000
• 6 months later, withdraw: 0.9 ETH (FMV $4,050) + 3,100 USDC (FMV $3,100)
• ETH: ACB $3,000, FMV $4,050 = gain $1,050 × 50% = $525 taxable
• USDC: ACB $3,000, FMV $3,100 = gain $100 × 50% = $50 taxable
• Total taxable capital gain: $575

Lending & Borrowing

Lending Crypto

Interest = investment or business income:

• 100% taxable when received
• FMV of tokens = income
• Cost basis (ACB) = income value

Borrowing Crypto

Taking loan = not taxable:

• Loans aren't income
• Depositing collateral = not a disposition
• Interest paid = not deductible (unless business)

Liquidations

Forced liquidation = disposition:

• Calculate capital gain/loss on collateral
• Apply 50% inclusion rate

Example: Lending on Aave

• Lend 10,000 USDC (ACB $10,000)
• Earn 5% APY = 500 USDC (FMV $500)
• Investment income: $500
• ACB for interest: $500

Example: Borrowing on Compound

• Deposit 2 ETH collateral (ACB $6,000)
• Borrow 4,000 USDC
• Tax: $0 (loans not taxable)
• Repay 4,200 USDC (4,000 + 200 interest)
• Interest not deductible (unless business loan)

Token Swaps

Every swap = barter transaction:

• Disposing of token A = capital gain/loss
• Acquiring token B at FMV = new ACB
• Apply 50% inclusion rate

Example: Uniswap Swap

• Buy 1 ETH for $3,000
• Swap for 3,000 DAI when ETH = $4,500
• Proceeds: $4,500
• ACB: $3,000
• Capital gain: $1,500
• Taxable capital gain: $1,500 × 50% = $750
• DAI ACB: $4,500

Wrapped Tokens

Conservative View (CRA Likely Position)

Wrapping = disposition:

• ETH → WETH = barter transaction
• WETH → ETH = barter transaction
• Usually no gain/loss if same value

Alternative View

Wrapping = not a disposition:

• No change in beneficial ownership
• WETH is just a receipt
• Riskier without CRA guidance

⚠️ Recommendation: Conservative approach is safer. If wrapping at same value, no gain/loss results anyway.

Airdrops & Governance Tokens

Receiving tokens = income:

• FMV when received = business or investment income
• 100% taxable
• ACB = income value

Example: UNI Airdrop

• Receive 400 UNI worth $1,600
• Investment income: $1,600
• ACB: $1,600
• Sell for $2,400
• Capital gain: $2,400 - $1,600 = $800
• Taxable: $800 × 50% = $400

Adjusted Cost Base (ACB)

Must track ACB for every token separately:

• Starting ACB = purchase price + fees
• Add: additional purchases, income tokens
• Subtract: disposals (proportional ACB)
• Average cost method (not FIFO/LIFO)

Example: ACB Tracking

• Jan: Buy 100 UNI for $500 (ACB: $500, avg $5/UNI)
• Mar: Earn 50 UNI ($600 income, $12/UNI)
• New ACB: $500 + $600 = $1,100 for 150 UNI (avg $7.33/UNI)
• Jun: Sell 75 UNI for $900
• ACB sold: 75 × $7.33 = $550
• Capital gain: $900 - $550 = $350
• Taxable: $350 × 50% = $175
• Remaining: 75 UNI, ACB $550

Superficial Loss Rule

Loss denied if you repurchase within 30 days:

• Sell at loss
• Repurchase same token within 30 days before or after
• Loss disallowed, added to new ACB

Example: Superficial Loss

• Sell 100 UNI at $350 loss
• 15 days later, buy 100 UNI for $800
• Loss denied
• New ACB: $800 + $350 = $1,150

Capital Gains Tax Rates

Inclusion Rate

50% of capital gains are taxable

Federal + Provincial Tax Rates (2024)

Capital gains taxed at 50% of these rates (inclusion rate)

How to Report

T1 Tax Return

1. Capital Gains: Schedule 3
2. Investment Income: Line 12100 (investment income)
3. Business Income: T2125 (Statement of Business Activities)
4. Track all dispositions with ACB calculations
5. Apply 50% inclusion rate to net capital gains

Deadlines

• Most Canadians: April 30
• Self-employed: June 15 (but payment due April 30)
• 2024 tax year due April 30, 2025

Gas Fees

Add to ACB or reduce proceeds:

• Buying: Add gas fees to ACB
• Selling: Subtract from proceeds
• Business: May deduct as business expense

Record Keeping

Keep records for 6 years after filing:

• Transaction hashes
• Wallet addresses
• CAD values at transaction times
• Gas fees
• ACB calculations for each token
• Smart contract interactions
• LP token holdings

Tools for DeFi Tracking

• Koinly - Best Canada support, ACB tracking
• CoinTracker - Strong DeFi categorization
• TokenTax - Business income tracking

Common Mistakes

1. Not tracking ACB properly: Must use average cost, not FIFO
2. Forgetting superficial loss rule: 30-day repurchase denies loss
3. Missing business vs investment classification: Affects deductions and treatment
4. Not reporting small DeFi income: All income must be reported
5. Claiming wrapped tokens aren't dispositions: Conservative view is safer
6. Not including gas fees in ACB: Reduces your tax liability

FAQs

Is DeFi yield taxed as income or capital gains in Canada?

DeFi rewards are income (business or investment) when received. When you sell those tokens later, the gain is capital gains with 50% inclusion rate.

Do I pay tax on unclaimed DeFi rewards?

Probably not until you claim and have control. Similar to staking rewards.

Are gas fees tax deductible in Canada?

Gas fees aren't separately deductible but add to ACB (buying) or reduce proceeds (selling). For business traders, may be deductible expenses.

Is providing liquidity a taxable event?

Adding liquidity is generally not taxable if you receive LP tokens. Removing is taxable if token amounts change.

Should I use FIFO or average cost for DeFi tokens?

CRA requires average cost method (called ACB). You must track the average cost basis across all purchases of the same token.

What's the difference between business and investment income?

Both are 100% taxable, but business income allows more expense deductions and may require HST/GST registration. Investment income has limited deductions but future gains get 50% capital gains treatment.