Taxes In Blockchain, Cryptocurrency Liquidity Mining & Yield Farming

Introduction - Blockchain or Cryptocurrency Liquidity Mining and Yield Farming

Blockchain or cryptocurrency liquidity mining (also called cryptocurrency yield farming) is an arrangement whereby you lend cryptocurrency to a start-up cryptocurrency platform seeking to raise capital. In return, the cryptocurrency platform usually gives you units or tokens of the platform's native cryptocurrency. These tokens serve as a reward or as consideration for injecting liquidity into a budding cryptocurrency platform. (Instead of, or in addition to, issuing reward tokens, the cryptocurrency platform might pay you interest.)

Hence, liquidity-mining and yield-farming arrangements generally take the form of a loan to a cryptocurrency platform or an investment in a cryptocurrency platform. This article examines the tax consequences for the lender or investor if the cryptocurrency platform repays the principal on the loan or returns the investor's capital.