3️⃣Consider the Tax Treatment

Consider the tax treatment of the yield generating activity

Once you have decided whether or not beneficial ownership has been transferred, you need to work out the tax treatment of the principal tokens staked/loaned/added as collateral upon entry to and exit from the yield generating activity. You also need to work out the tax treatment of the reward tokens received.

It is simplest to consider the tax treatment by splitting it into the various scenarios the taxpayer will fall into. For example, you will either have an income reward or a capital reward from locking up tokens in a yield generating activity and the tax treatment is different for each scenario. Also there are additional aspects to consider when taking out a collateralised loan (or other loan) from the point of view of the borrower, rather than the lender.

Tax position of the staker/lender/collateral provider:

Staker/Lender/Collateral Provider

Tax position of the borrower of tokens:

Borrower