Yield Farming Tax UK: HMRC Rules, LP Tokens & Impermanent Loss

What Yield Farming Means for HMRC

“Yield farming” is a broad umbrella term. HMRC does not recognise it as a tax category. What matters is what happens on-chain.

A typical farm combines several distinct steps:

• Deposit — you send two (or more) tokens into a liquidity pool
• Receipt — the protocol issues you an LP token representing your share
• Stake — you may stake that LP token into a separate rewards contract (itself a fresh beneficial-ownership question)
• Reward — you accrue and claim a governance or incentive token
• Exit — you unstake, redeem the LP token, and receive the underlying assets back

Each step is analysed on its own. What the protocol calls itself does not change the answer.

HMRC’s Income vs Capital Framework

There is no bespoke DeFi legislation. HMRC applies existing principles, set out in its dedicated DeFi guidance in the Cryptoassets Manual (CRYPTO61000 onwards), and asks:

In its DeFi guidance (CRYPTO61200 / CRYPTO61214) HMRC sets out indicators that point towards income treatment:

• The return is known or agreed rather than speculative
• The return is paid by a counterparty (borrower, protocol, treasury)
• The return is paid periodically over the life of the position
• The position has a defined term

The more of these are present, the more likely a reward is taxed as miscellaneous income on receipt. Speculative returns that arise only on exit tend to look capital. In practice, most farm rewards have at least some of these features and are treated as income.

The Three (or More) Taxable Events in One Farm

LP Tokens and Cost Basis

When you provide liquidity, the protocol issues a token (a Uniswap V2 pair token, a Curve LP token, a Balancer BPT, and so on) representing your claim on the pool.

HMRC’s actual test, at CRYPTO61620, is whether beneficial ownership of the deposited tokens transfers to the platform. Where it does, a disposal occurs and a section 104 pool is opened for the liquidity token; on withdrawal the liquidity token is disposed of and the tokens received are acquired at their then-market value. For most public AMM pools beneficial ownership does transfer in practice, so the disposal analysis follows — but the test is the test, and edge cases (escrow-style contracts, non-custodial positions where the depositor retains direct control) can break it.

The LP token is its own pooled asset under the section 104 pooling rules. Adding to the same pool position later increases the pool cost; partial withdrawals reduce it proportionately.

On exit, the LP token is disposed of and the underlying tokens are re-acquired at their then-market value. That value becomes the cost basis carried into your section 104 pool for each recovered asset — even if those tokens are the same ones (e.g. ETH) you originally deposited.

Impermanent Loss

Impermanent loss is the gap between holding two tokens outright and providing them as liquidity. As the price ratio moves, the pool rebalances and the liquidity provider ends up with more of the weaker asset and less of the stronger one.

From a UK tax perspective, impermanent loss is not itself a tax event.

If exiting produces a capital loss, you should still report it. Capital losses can be set against gains in the same year and, once properly notified to HMRC, carried forward to set against gains in later tax years.

Reward Tokens and Governance Tokens

Most farms emit a governance or incentive token — CRV, BAL, CAKE, SUSHI, and so on. HMRC’s position is that these are typically miscellaneous income, taxed at the GBP value on the date you become beneficially entitled to them.

Two practical points matter:

• Receipt date. HMRC tests this by reference to when the recipient becomes beneficially entitled to the tokens. For many DeFi reward contracts that is when the user calls the claim function, because before that the tokens sit in the contract and the user holds only a contractual right to claim rather than beneficial ownership of specific tokens. The alternative reading — that an enforceable accrual entitlement crystallises receipt earlier — is defensible in some contract designs but is not the dominant practitioner position.
• The £1,000 trading and miscellaneous income allowance covers your total gross miscellaneous income from crypto activity — including staking and small-scale mining. If gross income is £1,000 or less, no reporting is required. Above £1,000 you can either deduct actual allowable expenses or claim the £1,000 allowance instead, so that only the excess over £1,000 is taxable.

When the reward token is later sold or swapped, the income value already taxed becomes its base cost for CGT. Any movement in value between receipt and sale is a separate capital gain or loss.

Auto-Compounding Vaults

Vaults such as Yearn, Beefy and Convex automate the cycle of claim → swap → redeposit. The user holds a single vault token whose value gradually increases as the underlying farm earns rewards.

There are two reasonable readings, and HMRC has not given specific guidance:

For vaults that issue a fungible appreciating share token (yvDAI and similar), the capital-only reading is materially stronger than a simple consensus: the user has no beneficial ownership of any specific reward token at any point — only a redemption right against the vault — so there is no occasion of receipt to bring into miscellaneous income. Rebasing-style vaults that drop new tokens directly into the user’s wallet look much more like income, because the user does come into beneficial ownership of the new tokens. The right answer is fact-specific and turns on the share-token mechanics.

Locked and Vote-Escrowed Positions

Protocols like Curve (veCRV) and Convex (vlCVX) require tokens to be locked for a fixed term in exchange for boosted rewards and governance rights. The two are often grouped together but the tax analysis differs.

veCRV (Curve) is non-transferable and is in substance the locked CRV itself — same underlying asset, with time-locked rights attached. The “no disposal” argument here is strong: beneficial ownership has not moved and what the user holds is the same asset subject to a restriction on transfer.

vlCVX (Convex) and similar wrapped lock tokens are different in kind. CVX is exchanged for a separate, transferable representation token with its own rights. That looks much more like a swap — HMRC is correspondingly more likely to treat it as a disposal of CVX and an acquisition of vlCVX at market value.

Boosted reward emissions are miscellaneous income on receipt in both cases.

Failed, Rugged or Exploited Farms

If a farm is drained, the protocol pauses withdrawals, or the underlying token collapses to nothing, the LP token may still sit in your wallet with no realisable value.

There are two distinct routes in section 24 of the Taxation of Chargeable Gains Act 1992:

• s.24(1) — automatic disposal. If the asset has ceased to exist (for example, a contract has self-destructed or the token has been burned to zero), s.24(1) treats this as a disposal for nil consideration. No claim is required and there is no scope for an earlier effective date.
• s.24(2) — negligible value claim. Where the asset still exists but has become of negligible value, you must still own it when you make the claim. The claim is treated as made on the date HMRC receives it, but you may specify an earlier effective date of up to two years before the start of the tax year in which the claim is made. The asset must already have been of negligible value, and owned by you, at that earlier date.

In practice you need to evidence that the token has become of negligible value — not merely that the price has fallen sharply. Frozen contracts, exit-scam announcements, and confirmed exploits all support a claim. The loss flows into your CGT computation in the normal way.

The distinction matters for rugged farms specifically: if the underlying contract has been drained but the token contract is still live and the token still has theoretical existence, you are in s.24(2) territory and need to make the claim. If the contract is gone, s.24(1) does the work for you.

Gas, Slippage and Allowable Costs

Gas fees paid in connection with a disposal — entering a pool, exiting, swapping a reward token — are allowable as incidental costs of acquisition or disposal for CGT purposes.

Gas spent solely to claim a reward sits less neatly. HMRC’s Cryptoassets Manual confirms at CRYPTO21200 that “appropriate expenses” can reduce the amount of staking-type miscellaneous income chargeable to tax, which gives a textual hook for treating claim gas as deductible on the income side where it is genuinely incurred in obtaining the reward. This is a working interpretation rather than a settled HMRC view, and the manual is not specific to claim gas. An alternative practical approach is to treat unrecovered claim gas as part of the reward token’s base cost instead. Be consistent across the tax year either way.

Slippage and price impact are not separate deductions. They are reflected automatically in the value of what you receive on each side of the transaction.

Reporting and Record-Keeping

Capital Gains

Report on the cryptoassets section of the SA108 (boxes 13.1–13.8). For people already within Self Assessment, the CGT pages must be completed where either total gains exceed the £3,000 annual exempt amount or total disposal proceeds exceed £50,000 — even if no tax is due.

CGT Rates (2025–2026)

Crypto gains are taxed at 18% within the unused basic-rate band and 24% above it, after the £3,000 annual exempt amount.

Income

Reward tokens are reported as other taxable income on SA100 (box 17), with the underlying details supported by your own working papers. Express everything in GBP at the date of receipt, using a consistent pricing source.

Losses

Losses on LP exits or on selling reward tokens are capital losses. Notify HMRC within four years of the end of the tax year in which the loss arises to preserve the carry-forward.

Records

For each farm position: deposit tx hash, deposit GBP value per token, LP token contract and amount, every reward claim with date and GBP value, exit tx hash, exit GBP value per token. See our record-keeping guide for the full HMRC standard.

The HMRC DeFi Consultation

HMRC ran a call for evidence in 2022 and a formal consultation between 27 April and 22 June 2023 on the taxation of DeFi involving the lending and staking of cryptoassets. A summary of responses was published on 26 November 2025 (Budget Day), in which HMRC confirmed it is still considering an approach under which entering and exiting qualifying DeFi arrangements would not give rise to a disposal — tax would crystallise only when the user economically exits.

Worked Example: A Full Farming Lifecycle

A UK resident provides liquidity to an ETH/USDC pool and stakes the LP token for CRV-style rewards.

For the 2025–2026 tax year, the user has £900 of miscellaneous income, a net capital gain of £2,500 (£2,000 + £800 − £300), and a higher base cost on their ETH for future disposals. None of these flowed automatically from an exchange CSV — each step had to be reconstructed from on-chain history.

The example assumes the section 104 ETH pool contained only the 2 ETH acquired at £4,000. A real calculation would aggregate every prior ETH acquisition into the pool, and the deemed cost of the 2 ETH disposed of would be the pool average rather than the original purchase price.

Common Misunderstandings

“No tax until I withdraw to GBP”

Entering and exiting the pool, and claiming rewards, are taxable events on their own.

“Impermanent loss reduces my income tax”

It does not. Reward income is taxed at the GBP value on receipt regardless of what happens to the pool. Impermanent loss flows only into the CGT calculation on exit.

“If I never claim, I’m never taxed”

Where rewards are an enforceable entitlement they can be taxable as they accrue, not when claimed. Using the claim date is a practical convention, not a tax shelter.

“Compounding is internal — no taxable event”

Each compound cycle that involves a claim of new tokens and a fresh deposit is potentially a sequence of taxable events. Vaults that issue a single appreciating share token are a possible exception.

“The new HMRC rules mean LP deposits aren’t disposals”

The No Gain, No Loss regime has been consulted on but not enacted. Current rules continue to apply.