A quick background on YFI

YFI was released in July by Andre Cronje as a governance token for Yearn finance. The supply was capped at 30,000 and was meant to have no value but to help decide the future of the project through community involvement. As a reward for providing liquidity people were airdropped YFI tokens based on how much liquidity they provided. YFI was also tradable on Uniswap so even though it was conceived to have no value holders could sell it and speculators could buy it.

Based on this there are two unique scenarios for how holders could acquire YFI that result in two distinct tax possibilities.

You Bought YFI on Uniswap

If you bought YFI on Uniswap this was likely how the transaction flow could have gone:

1. You sold 1 ETH and in return got 10 YFI tokens

2. You held YFI during the price rise and decided to sell some of your stack

3. You sold 5 YFI for 200 ETH

4. The price goes even higher and you sell the rest of your stack

5. You sold the remaining 5 YFI for 300 ETH

Based on this transaction flow there are 3 distinct tax events that potentially occur.

1. When you bought 10 YFI you also sold 1 ETH, because you disposed of one asset this triggers a capital gain event on the 1 ETH you held.

2. When you sold the first 5 YFI it triggers another capital gains event, at this point, it would be a capital gain and not a loss where the gain would be the difference in your buy and sell price in AUD (not ETH).

3. When you sell the remaining YFI it triggers a capital gain event similar to number 2.

You acquired YFI from providing liquidity in the Yearn.finance protocol

Because in this case, you didn’t buy YFI the tax implications are a bit different.

Let’s say the transaction flow went like this:

1. You were airdropped 3 YFI for providing liquidity, at the time 1 YFI = $40

2. You sell all 3 of your YFI 2 weeks later for 120 ETH

3. You move your ETH to a centralized exchange like Binance and exchange the 120 ETH for $70,000 AUD

Again based on the transactions above there are 3 separate tax events that could have occurred:

1. When you are airdropped the YFI you incur an income tax based on the value at the time of airdropping, in this case, $120

2. When you sell your 3 YFI for 120 ETH this incurs a capital gains tax event, at the time you sell the 10 ETH is worth $65,000, so the capital gains are $65,000 - $120 = $64,880.

Moving the ETH to another exchange doesn’t incur a tax but exchanging the ETH for AUD does incur another capital gains tax. In this case, because you bought the ETH for $65,000 when you sold the YFI and now it is worth $70,000 the capital gains are $5,000.

So based on this case you owe income tax on the $120 and capital gains on the $69,880.

The key differentiator here is that if you buy YFI you are only subject to capital gains tax but if you gained YFI from providing liquidity you are also subject to income tax.

Wrapping Up

If you were one of the lucky few to buy YFI or even better earn YFI from supplying liquidity it could be one of the most profitable trades of your life. However, the tax office, no matter what country you are in is going to want a healthy bite of that profit. Figuring out exactly what you owe based on how and when you acquired YFI is a legal requirement. Luckily for you, Summ (formerly Crypto Tax Calculator) can automate that process for you.