Detailed Instructions

Begin by compiling a complete transaction history from all wallets used with lending protocols like Aave, Compound, or MakerDAO. On-chain data is immutable and forms the basis of your tax report. Use blockchain explorers (Etherscan, Arbiscan) or specialized DeFi tax software to export all interactions for the tax year.

• Sub-step 1: Gather Wallet Addresses: List every address (e.g., 0x742d35Cc6634C0532925a3b844Bc9e...) you've used to supply or borrow assets.
• Sub-step 2: Filter for Protocol Contracts: Identify transactions sent to known protocol contract addresses. For example, Aave's LendingPool contract on Ethereum mainnet is 0x7d2768dE32b0b80b7a3454c06BdAc94A69DDc7A9.
• Sub-step 3: Categorize Actions: Label each transaction as a deposit (supply), withdrawal, borrow, or repayment. This creates a clear ledger of capital flows.

Tip: Use a CSV export from your tax tool and create separate columns for action, asset, amount, timestamp, and transaction_hash for easy analysis.

Detailed Instructions

Interest income from supplied assets and protocol reward tokens (like AAVE or COMP) are taxable events upon receipt. The fair market value in your local currency at the time of receipt determines the income amount. For accrual-method taxpayers, interest may be taxable as it accrues, not just when claimed.

• Sub-step 1: Track Accrued Interest: Review your protocol dashboard or use an API to find the interest earned on supplied assets (e.g., 3.2% APY on 10,000 USDC).
• Sub-step 2: Locate Reward Distributions: Identify transactions where governance or incentive tokens were transferred to your wallet. Query a subgraph for your address:

graphqlCopy
query {
  userRewards(where: {user: "YOUR_ADDRESS"}) {
    amount
    timestamp
    rewardToken
  }
}

• Sub-step 3: Record FMV: Use a historical price API (CoinGecko, CoinMarketCap) to find the USD value of the interest/reward at the precise block timestamp.

Tip: Staking reward tokens for additional yield creates a new, separate income stream—track these staking rewards as well.

Detailed Instructions

Withdrawing a crypto asset you supplied, or using an asset to repay a loan, can trigger a capital gain or loss. This is calculated by comparing the asset's cost basis (what you paid for it) to its fair market value at the time of the withdrawal or repayment. A key complexity is that supplying an asset to a pool does not itself trigger a taxable event.

• Sub-step 1: Establish Cost Basis: For the withdrawn asset, determine its original purchase cost (e.g., bought 1 ETH for $1,800).
• Sub-step 2: Determine Disposal Value: Find the USD value of 1 ETH at the exact time of the withdrawal from the protocol (e.g., $2,500).
• Sub-step 3: Compute Gain/Loss: Apply the formula: Gain = (Disposal Value - Cost Basis). In our example: $2,500 - $1,800 = $700 capital gain.
• Sub-step 4: Apply to Repayments: If you repay a 1000 DAI loan by purchasing DAI on an exchange, the purchase is not a taxable event, but any gain/loss on the asset used to acquire that DAI might be.

Tip: Use specific identification (e.g., FIFO, LIFO) consistently for cost basis calculation as per your tax jurisdiction's rules.

Detailed Instructions

Borrowing crypto assets is generally not a taxable event; it's creating a liability. However, subsequent events have major implications. If your collateral is liquidated because your loan's health factor falls below 1.0 (e.g., Health Factor = Collateral Value / Borrowed Value), it is treated as a disposal of the collateral asset, triggering a capital gain or loss. Furthermore, changes in the USD value of an outstanding loan do not create taxable income or loss.

• Sub-step 1: Monitor Loan Health: Track your health factor on-chain. A drop below the protocol's threshold (often 1.0) triggers liquidation.
• Sub-step 2: Record Liquidation Events: If liquidated, note the amount of collateral seized (e.g., 0.5 ETH) and its USD value at that moment. Calculate gain/loss on that disposed collateral.
• Sub-step 3: Analyze Debt Forgiveness: In rare protocol scenarios, if debt is forgiven or written off, the forgiven amount may be considered taxable income.
• Sub-step 4: Document Loan Closure: When you finally repay the loan and reclaim all collateral, calculate any capital gains on the withdrawn collateral as in Step 3.

Tip: Using borrowed stablecoins to purchase other assets creates a new, separate cost basis for that purchase, complicating the gain/loss calculation upon its eventual sale.

Detailed Instructions

Begin by exporting all transaction history from the wallets and smart contracts involved in your DeFi lending protocols (e.g., Aave, Compound). Use blockchain explorers like Etherscan for Ethereum or Arbiscan for Arbitrum, connecting your wallet address (e.g., 0x742d35Cc6634C0532925a3b844Bc9e...). The critical task is categorizing each transaction into a specific accounting event.

• Sub-step 1: Identify Core Events: Filter transactions for Supply, Withdraw, Borrow, and Repay function calls. For example, an Aave supply transaction will have a method ID like 0x617ba037.
• Sub-step 2: Capture Asset Details: For each event, record the token contract address (e.g., USDC: 0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48), quantity, USD value at the time of the transaction, and the associated gas fee.
• Sub-step 3: Map to Protocol Pools: Note the specific liquidity pool or market, such as the Aave USDC aToken contract (0xBcca60bB61934080951369a648Fb03DF4F96263C), as this dictates interest calculations.

Tip: Use a dedicated DeFi portfolio tracker (like Zerion or DeBank) for an initial aggregated view, but always verify with raw blockchain data for accuracy.

Detailed Instructions

Interest in DeFi often accrues continuously and is represented by an increasing balance of receipt tokens (like aTokens or cTokens). The increase in the quantity of these tokens between two points constitutes taxable income. Additionally, many protocols distribute governance token rewards (e.g., COMP, AAVE) for participation, which are income at fair market value upon receipt.

• Sub-step 1: Calculate Lending Interest: For a supplied asset, compare your aToken balance at the start and end of the tax period. The difference, converted to the underlying asset and valued in USD, is interest income. You can query the balance using a node or subgraph.

javascriptCopy
// Example: Get aUSDC balance for an address via ethers.js
const aUSDC = new ethers.Contract(aUSDC_Address, erc20Abi, provider);
const balance = await aUSDC.balanceOf('0xYourAddress');

• Sub-step 2: Capture Reward Tokens: Identify all Claim or Transfer events of reward tokens to your wallet. Record the date, quantity, and USD price at the time of receipt.
• Sub-step 3: Calculate Borrowing Costs: Interest paid on borrowed assets may be tax-deductible (subject to jurisdiction). Sum all Repay transactions that constitute interest, excluding principal repayments.

Tip: For precise daily accruals, use protocol subgraphs or APIs that provide historical index/rate data to calculate interest earned on any specific day.

Detailed Instructions

This step addresses two complex events: collateral liquidation and the disposition of borrowed assets. When borrowed assets are sold or traded, it may trigger a taxable event based on their cost basis (typically $0 or the value when borrowed). Liquidations involve a forced sale of collateral, creating a disposal event for the seized assets.

• Sub-step 1: Establish Borrowed Asset Basis: When you borrow an asset (e.g., borrow 1 ETH), its cost basis is its fair market value at that moment (e.g., $1,800). If you later sell that 1 ETH for DAI, you have a capital gain/loss based on that $1,800 basis.
• Sub-step 2: Account for Liquidations: If your loan's health factor drops below 1.0, a portion of your collateral may be liquidated. You must calculate the USD value of the collateral seized and report it as a disposal. For example, 0.5 ETH collateral liquidated at $2,000/ETH is a $1,000 disposal event.
• Sub-step 3: Reconcile Debt Closure: Repaying a loan in full does not create a taxable event for the repayment itself. However, any gain/loss on the borrowed assets you used (and potentially disposed of) during the loan term must already be accounted for in Step 2 and Sub-step 1 here.

Tip: Maintain a separate ledger for each open debt position, tracking the amount, asset, cost basis of borrowed funds, and associated collateral to simplify liquidation accounting.

Detailed Instructions

Consolidate the calculated data into the reporting formats required by your tax authority (e.g., IRS Form 8949 and Schedule D in the US, or equivalent). The key is separating ordinary income (interest, rewards) from capital gains/losses (from disposing of collateral or borrowed assets). Use the specific dates and USD values recorded in previous steps.

• Sub-step 1: Create Income Schedule: List all interest income (from aToken accruals) and reward token income with their receipt dates and USD values. This constitutes ordinary income.
• Sub-step 2: Create Capital Asset Schedule: List every disposal event. This includes:
  • Sale of borrowed assets (cost basis from Step 3).
  • Collateral lost in liquidations (cost basis is your original purchase price of that collateral).
  • Any sale of interest-bearing aTokens themselves.
• Sub-step 3: Apply Specific Identification: For disposals, you must identify which specific lot of an asset was sold (e.g., which batch of ETH was liquidated). Use the First-In-First-Out (FIFO) method or another consistent, documented method.
• Sub-step 4: Document and File: Keep a complete audit trail of all source data, calculations, and the final report. Consider using a crypto-specific tax software API (like CoinTracker or Koinly) to automate form generation using your compiled CSV data.

Tip: Consult a tax professional experienced in crypto to confirm the treatment of complex events like liquidations and the deductibility of borrowing costs in your jurisdiction.