The Tax Nightmare of DeFi: Staking, Wrapping & Liquidity Pools

April 20, 2026 | By Sarah Jenkins, CPA

Decentralized Finance (DeFi) offers incredible yields, but it also creates incredibly complex tax events. Many users believe that as long as they stay "on-chain" and don't go back to AUD, they are safe. The ATO disagrees.

Here are the 3 most common DeFi activities and how they are taxed in Australia.

1. Wrapping Tokens (e.g., ETH to wETH)

To use Ethereum on certain dApps, you often need to "wrap" it. You might think 1 ETH = 1 wETH, so it's the same asset.

ATO View: Wrapping a token is considered a Capital Gains Event. You are disposing of Asset A (ETH) to acquire Asset B (wETH). If the price of ETH rose between when you bought it and when you wrapped it, you owe tax on that gain.

2. Liquidity Pools (LPs)

When you deposit ETH and USDT into a liquidity pool, you receive a "LP Token" in return. This is also a taxable event. You have effectively sold your ETH and USDT in exchange for the LP Token.

When you exit the pool, another taxable event occurs. The "Impermanent Loss" you suffered might be deductible, but calculating it requires specialized software.

3. Staking Rewards

If you lock up your crypto and receive daily rewards (like interest), these rewards are taxed as Ordinary Income at the market value on the day you received them.

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Summary

DeFi is the frontier of finance, but the tax rules are from the traditional world. Be very careful with every smart contract interaction—it could be a taxable event.