💼 Secure Your Free $RESOLV Tokens
🚀 The Resolv airdrop is now available!
🔐 No risk, no fees — just a simple registration and claim.
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🌍 Be an early participant in an emerging project.
💸 Why wait? The next opportunity to grow your assets starts here.
- Understanding DeFi Yield and Indian Tax Obligations
- Tax Classification of DeFi Earnings in India
- Step-by-Step Guide to Reporting DeFi Yield
- Critical Documentation Requirements
- Common Reporting Mistakes to Avoid
- FAQs: Reporting DeFi Yield in India
- 1. Is DeFi yield taxed differently than crypto trading profits?
- 2. Do I pay tax if I reinvest my yield?
- 3. How do I value yield paid in obscure tokens?
- 4. Are there TDS requirements for DeFi?
- 5. Can losses from impermanent loss offset yield income?
- 6. What if I used VPNs for foreign DeFi platforms?
Understanding DeFi Yield and Indian Tax Obligations
Decentralized Finance (DeFi) has revolutionized investing, allowing Indians to earn yield through lending, staking, and liquidity pools. However, the Reserve Bank of India (RBI) and Income Tax Department treat all crypto earnings as taxable income. Whether you’re earning interest from Aave, staking rewards on Polygon, or LP tokens from Uniswap – these returns qualify as “Income from Other Sources” under Section 56 of the Income Tax Act. Failure to report can trigger penalties up to 50% of tax owed plus 1% monthly interest.
Tax Classification of DeFi Earnings in India
Indian tax authorities categorize DeFi yields based on activity:
- Lending Rewards: Interest from platforms like Compound taxed as “Income from Other Sources”
- Staking Income: Rewards from validators (e.g., Ethereum 2.0) taxed upon receipt at fair market value
- Liquidity Mining: LP token rewards treated as income when claimed or converted to fiat
- Airdrops & Forks: Taxable as income at time of receipt per CBDT guidelines
Step-by-Step Guide to Reporting DeFi Yield
- Track All Transactions: Use tools like Koinly or CoinTracker to log yield dates, amounts in INR, and wallet addresses
- Convert to INR: Calculate yield value using exchange rates on transaction dates (refer to WazirX/Binance historical data)
- File Under ITR-2/ITR-3: Report totals under “Income from Other Sources” in Schedule OS
- Disclose Foreign Assets
- Pay Advance Tax: If tax liability exceeds ₹10,000/year, pay quarterly via Form 26QB
Critical Documentation Requirements
- Wallet transaction histories with timestamps
- Exchange statements showing INR conversions
- Smart contract addresses for yield-generating protocols
- Proof of TDS deductions (if applicable)
Common Reporting Mistakes to Avoid
Many taxpayers face scrutiny due to:
- Not reporting unrealized yield (taxable upon accrual)
- Using incorrect FY conversion rates
- Omitting small-value airdrops (“notional income” rules apply)
- Failing to report cross-chain yields (e.g., Polygon rewards on Ethereum wallets)
FAQs: Reporting DeFi Yield in India
1. Is DeFi yield taxed differently than crypto trading profits?
Yes. Trading profits fall under “Capital Gains,” while DeFi yields are “Income from Other Sources” taxed at your income slab rate (up to 30%).
2. Do I pay tax if I reinvest my yield?
Reinvestment doesn’t defer taxation. You owe tax in the Financial Year when yield is credited to your wallet.
3. How do I value yield paid in obscure tokens?
Use the token’s price on Indian exchanges (WazirX/CoinDCX) at UTC 00:00 on receipt date. If unavailable, reference global averages from CoinGecko.
4. Are there TDS requirements for DeFi?
Currently no TDS on DeFi transactions, but proposed 1% TDS under Crypto Bill may apply if enacted.
5. Can losses from impermanent loss offset yield income?
No. Impermanent loss isn’t recognized until you exit the liquidity pool, while yield is taxable immediately.
6. What if I used VPNs for foreign DeFi platforms?
VPN usage doesn’t exempt taxation. You must still declare all earnings and may need to file Schedule FA for foreign asset disclosure.
💼 Secure Your Free $RESOLV Tokens
🚀 The Resolv airdrop is now available!
🔐 No risk, no fees — just a simple registration and claim.
⏳ You have 1 month after signing up to receive your tokens.
🌍 Be an early participant in an emerging project.
💸 Why wait? The next opportunity to grow your assets starts here.
