Yield Farming: Strategies and Tax Declaration in France

Introduction

Maximize your DeFi yields by intelligently combining multiple protocols.

Yield farming allows maximizing returns in DeFi by providing liquidity or combining multiple protocols. This guide explores strategies, risks, and the tax treatment of this complex practice.

Table of Contents

1. Understanding Yield Farming
2. Main Strategies
3. Risks to Master
4. Taxation in France
5. Practical Declaration
6. Tools and Tracking
7. FAQ

1. Understanding Yield Farming

Combine multiple DeFi income sources to optimize your overall yields.

Definition

Yield farming involves deploying your crypto assets across different DeFi protocols to generate yields, often by combining multiple income sources.

Yield Sources

DeFi Composability

+-------------------------------------------------------------+
|              EXAMPLE OF COMPOSED STRATEGY                   |
|                                                             |
|  1. Deposit ETH on Lido -> Receive stETH                    |
|  2. Deposit stETH on Aave as collateral                     |
|  3. Borrow USDC against stETH                               |
|  4. Provide USDC as liquidity on Curve                      |
|  5. Stake Curve LP tokens -> Receive CRV                    |
|                                                             |
|  CUMULATIVE YIELDS:                                         |
|  + ETH Staking (4%)                                         |
|  + Curve fees (2%)                                          |
|  + CRV rewards (5%)                                         |
|  - USDC borrowing interest (-3%)                            |
|  = ~8% net (before risks and taxes)                         |
+-------------------------------------------------------------+

2. Main Strategies

From liquidity provision to borrowing loops, each strategy has its logic.

Liquidity Provision (LP)

Mechanism: Deposit a pair of tokens in a DEX liquidity pool.

Yields:

• Trading fees (0.3% typically shared among LPs)
• Reward tokens (farming incentives)

Main risk: Impermanent Loss

Lending/Borrowing Loop

Mechanism:

1. Deposit an asset as collateral
2. Borrow another asset
3. Redeposit the borrowed asset
4. Repeat (leverage effect)

Yields:

• Spread between deposit and borrowing rates
• Governance token rewards

Main risk: Cascading liquidation

Stablecoin Farming

Mechanism: Provide liquidity on stable pairs (USDC/USDT, 3pool).

Advantage: No impermanent loss (correlated assets)

Yields: 3-10% depending on incentives

Leveraged Strategies

Mechanism: Use protocols allowing borrowing against LP tokens.

Potential yields: 20-50%+

Risks: Very high (liquidation, smart contract)

3. Risks to Master

Impermanent loss, smart contracts, and liquidation: the dangers of yield farming.

Impermanent Loss

Definition: Potential loss compared to simply holding, due to price divergence of assets in a pool.

Example:

Deposit: 1 ETH + 3,000 USDC (ETH = $3,000)
Situation after ETH increase ($4,000):
- If held: 1 ETH + 3,000 USDC = $7,000
- In pool: 0.866 ETH + 3,464 USDC = $6,928
Impermanent Loss: ~$72 (-1%)

Smart Contract Risk

Major Hack History:

• Harvest Finance: $34M (2020)
• Cream Finance: $130M (2021)
• Wormhole: $320M (2022)

Liquidation Risk

If you borrow against your collateral:

• Collateral drops -> ratio too low -> liquidation
• Loss of part or all of collateral

Rug Pull Risk

Malicious protocols that disappear with funds.

Risk Table by Strategy

4. Taxation in France

Each DeFi event potentially generates a complex taxable event.

Yield Farming Complexity

Yield farming generates multiple potential taxable events:

Income Qualification

LP fees and farming tokens: Generally qualified as BNC income (if occasional) or BIC (if professional).

Capital gains on swaps: The crypto capital gains regime applies (PFU 30%).

Taxable Event

Each farming token reception = potential taxable event, valued at day's rate.

5. Practical Declaration

Track all your DeFi transactions to facilitate your annual tax declaration.

Required Documentation

• History of all DeFi transactions
• Farming tokens received (dates, amounts, rates)
• LP fees collected
• Calculation of realized impermanent loss
• Acquisition price of LP tokens

Tracking Tools

Possible Simplifications

Pragmatic Approach:

1. Calculate net annual yield
2. Declare as global BNC income
3. Keep detailed proofs

Warning: This simplification carries risks. Consult a tax advisor for significant amounts.

6. Tools and Tracking

Use dashboards and aggregators to track your positions in real-time.

DeFi Dashboards

Yield Aggregators

Impermanent Loss Tracking

APY.Vision calculates real IL on your LP positions.

7. FAQ

Q: Is yield farming profitable after taxes?

A: It depends. With a high marginal rate and strong income taxation, net yield can be significantly reduced. Example: 10% gross -> ~6% net after taxes (TMI 30% + SC).

Q: How to prove my DeFi transactions to tax authorities?

A: Through blockchain explorers (Etherscan, etc.), tracking tool exports, and protocol screenshots. Everything is verifiable on-chain.

Q: Is impermanent loss deductible?

A: This is debated. IL is only "realized" at withdrawal. It could be integrated into the capital gain/loss calculation at pool exit.

Q: Can I be considered a professional?

A: If the activity is habitual, significant, with substantial means (bots, full-time), yes. Consequence: BIC + social contributions (~45%).

Conclusion

Yield farming offers attractive yields but carries significant technical, financial, and tax risks. A methodical approach is essential.

Key Points:

• Understand each strategy before applying it
• Evaluate risks (IL, smart contract, liquidation)
• Document all transactions
• Anticipate taxation (which can significantly reduce net yield)
• Use tracking tools

Final Advice: Start simple (stablecoin LP, basic lending) before exploring complex strategies.

Article updated December 2025. Educational information. Consult a tax advisor and do your own research.

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