DeFi Accounting Made Simple: Tracking Yield Farming, Liquidity Pools, and Staking Rewards with Plain-Text Accounting
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Decentralized Finance (DeFi) has revolutionized how we interact with financial services, offering unprecedented opportunities for yield generation, liquidity provision, and decentralized trading. However, with these opportunities comes the challenge of accurately tracking complex transactions for tax compliance and portfolio management.
Traditional accounting methods struggle with DeFi's unique characteristics: automated market makers, liquidity mining, impermanent loss, and multi-token rewards. This comprehensive guide shows you how to master DeFi accounting using Beancount.io's powerful plain-text accounting system.
Understanding DeFi Accounting Challenges
The Complexity of DeFi Transactions
DeFi protocols create accounting challenges that don't exist in traditional finance:
- Multi-token transactions: Single operations involving multiple cryptocurrencies
- Automated compounding: Rewards automatically reinvested
- Impermanent loss: Value changes due to price divergence in liquidity pools
- Gas fee optimization: Complex fee structures across different networks
- Protocol governance: Voting rights and governance token distributions
- Cross-protocol interactions: Transactions spanning multiple DeFi platforms
Tax Implications of DeFi Activities
The IRS treats DeFi activities as taxable events:
- Liquidity provision: May trigger taxable events when depositing assets
- Yield farming rewards: Taxable as ordinary income at fair market value
- Impermanent loss: Potential tax implications when withdrawing from pools
- Governance tokens: Airdrops and rewards taxable as income
- Staking rewards: Taxable as income when received
Setting Up DeFi Accounts in Beancount.io
Comprehensive Account Structure
Create a detailed account hierarchy that captures all DeFi activities:
; Wallet Accounts
1970-01-01 open Assets:Crypto:Wallet:MetaMask:ETH
1970-01-01 open Assets:Crypto:Wallet:MetaMask:USDC
1970-01-01 open Assets:Crypto:Wallet:MetaMask:DAI
1970-01-01 open Assets:Crypto:Wallet:MetaMask:WBTC
; Uniswap V3 Liquidity Pools
1970-01-01 open Assets:DeFi:Uniswap:ETH-USDC-LP
1970-01-01 open Assets:DeFi:Uniswap:DAI-USDC-LP
1970-01-01 open Assets:DeFi:Uniswap:WBTC-ETH-LP
; Compound Protocol
1970-01-01 open Assets:DeFi:Compound:cUSDC
1970-01-01 open Assets:DeFi:Compound:cETH
1970-01-01 open Assets:DeFi:Compound:cDAI
; Aave Protocol
1970-01-01 open Assets:DeFi:Aave:aUSDC
1970-01-01 open Assets:DeFi:Aave:aETH
1970-01-01 open Assets:DeFi:Aave:DebtETH
; Staking Protocols
1970-01-01 open Assets:Staking:Ethereum:ETH
1970-01-01 open Assets:Staking:Lido:stETH
1970-01-01 open Assets:Staking:RocketPool:rETH
; Income Accounts
1970-01-01 open Income:DeFi:Yield:Uniswap
1970-01-01 open Income:DeFi:Yield:Compound
1970-01-01 open Income:DeFi:Yield:Aave
1970-01-01 open Income:DeFi:Staking:Ethereum
1970-01-01 open Income:DeFi:Governance:Tokens
1970-01-01 open Income:DeFi:Airdrops
; Expense Accounts
1970-01-01 open Expenses:DeFi:Gas:Ethereum
1970-01-01 open Expenses:DeFi:Gas:Polygon
1970-01-01 open Expenses:DeFi:Gas:Arbitrum
1970-01-01 open Expenses:DeFi:ImpermanentLoss
DeFi-Specific Commodities
Define tokens and LP tokens with proper metadata:
1970-01-01 commodity UNI-V3-ETH-USDC
name: "Uniswap V3 ETH-USDC LP Token"
asset-class: "liquidity-pool"
protocol: "uniswap-v3"
1970-01-01 commodity cUSDC
name: "Compound USDC"
asset-class: "lending-token"
protocol: "compound"
1970-01-01 commodity stETH
name: "Lido Staked Ethereum"
asset-class: "staking-derivative"
protocol: "lido"
Tracking Common DeFi Activities
1. Uniswap Liquidity Provision
Adding Liquidity to a Pool
2024-01-15 * "Add liquidity to ETH-USDC Uniswap V3 pool"
Assets:Crypto:Wallet:MetaMask:ETH -5.0 ETH {2500.00 USD}
Assets:Crypto:Wallet:MetaMask:USDC -12500 USDC
Assets:DeFi:Uniswap:ETH-USDC-LP 100 UNI-V3-ETH-USDC {250.00 USD}
Expenses:DeFi:Gas:Ethereum 0.01 ETH {2500.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.01 ETH {2500.00 USD}
Claiming LP Fees
2024-02-15 * "Claim Uniswap LP fees"
Assets:Crypto:Wallet:MetaMask:ETH 0.2 ETH {2600.00 USD}
Assets:Crypto:Wallet:MetaMask:USDC 300 USDC
Income:DeFi:Yield:Uniswap 820.00 USD
Expenses:DeFi:Gas:Ethereum 0.005 ETH {2600.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.005 ETH {2600.00 USD}
Removing Liquidity with Impermanent Loss
2024-03-15 * "Remove liquidity from ETH-USDC pool"
Assets:DeFi:Uniswap:ETH-USDC-LP -100 UNI-V3-ETH-USDC {250.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH 4.8 ETH {2800.00 USD}
Assets:Crypto:Wallet:MetaMask:USDC 12800 USDC
Expenses:DeFi:ImpermanentLoss 240.00 USD ; IL calculation
Expenses:DeFi:Gas:Ethereum 0.008 ETH {2800.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.008 ETH {2800.00 USD}
2. Compound Protocol Lending
Supplying Assets to Compound
2024-01-20 * "Supply USDC to Compound"
Assets:Crypto:Wallet:MetaMask:USDC -10000 USDC
Assets:DeFi:Compound:cUSDC 500 cUSDC {20.00 USD}
Expenses:DeFi:Gas:Ethereum 0.008 ETH {2500.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.008 ETH {2500.00 USD}
Earning Compound Interest
2024-02-20 * "Compound interest accrual"
Assets:DeFi:Compound:cUSDC 5.2 cUSDC {20.50 USD}
Income:DeFi:Yield:Compound 106.60 USD
Claiming COMP Rewards
2024-02-20 * "Claim COMP governance tokens"
Assets:Crypto:Wallet:MetaMask:COMP 12 COMP {85.00 USD}
Income:DeFi:Governance:Tokens 1020.00 USD
Expenses:DeFi:Gas:Ethereum 0.006 ETH {2600.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.006 ETH {2600.00 USD}
3. Aave Protocol Operations
Depositing and Borrowing
; Deposit ETH as collateral
2024-01-25 * "Deposit ETH to Aave"
Assets:Crypto:Wallet:MetaMask:ETH -10 ETH {2500.00 USD}
Assets:DeFi:Aave:aETH 10 aETH {2500.00 USD}
Expenses:DeFi:Gas:Ethereum 0.01 ETH {2500.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.01 ETH {2500.00 USD}
; Borrow USDC against ETH collateral
2024-01-25 * "Borrow USDC from Aave"
Assets:Crypto:Wallet:MetaMask:USDC 15000 USDC
Liabilities:DeFi:Aave:DebtUSDC -15000 USDC
Expenses:DeFi:Gas:Ethereum 0.008 ETH {2500.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.008 ETH {2500.00 USD}
Repaying Loans with Interest
2024-03-25 * "Repay USDC loan to Aave"
Liabilities:DeFi:Aave:DebtUSDC 15000 USDC
Expenses:DeFi:Interest:Aave 450 USDC ; Interest accrued
Assets:Crypto:Wallet:MetaMask:USDC -15450 USDC
Expenses:DeFi:Gas:Ethereum 0.008 ETH {2700.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.008 ETH {2700.00 USD}
4. Ethereum Staking
Direct Ethereum Staking
2024-01-10 * "Stake ETH on Ethereum 2.0"
Assets:Crypto:Wallet:MetaMask:ETH -32 ETH {2500.00 USD}
Assets:Staking:Ethereum:ETH 32 ETH {2500.00 USD}
Expenses:DeFi:Gas:Ethereum 0.01 ETH {2500.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.01 ETH {2500.00 USD}
Staking Rewards
2024-02-10 * "ETH staking rewards"
Assets:Staking:Ethereum:ETH 0.15 ETH {2600.00 USD}
Income:DeFi:Staking:Ethereum 390.00 USD
Liquid Staking with Lido
2024-01-12 * "Stake ETH with Lido"
Assets:Crypto:Wallet:MetaMask:ETH -10 ETH {2500.00 USD}
Assets:Staking:Lido:stETH 10 stETH {2500.00 USD}
Expenses:DeFi:Gas:Ethereum 0.008 ETH {2500.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.008 ETH {2500.00 USD}
Advanced DeFi Scenarios
Yield Farming Strategies
Multi-Protocol Yield Farming
; Step 1: Deposit USDC to Compound
2024-01-30 * "Deposit USDC to Compound for yield farming"
Assets:Crypto:Wallet:MetaMask:USDC -20000 USDC
Assets:DeFi:Compound:cUSDC 1000 cUSDC {20.00 USD}
; Step 2: Borrow DAI against cUSDC
2024-01-30 * "Borrow DAI from Compound"
Assets:Crypto:Wallet:MetaMask:DAI 15000 DAI
Liabilities:DeFi:Compound:DebtDAI -15000 DAI
; Step 3: Provide DAI-USDC liquidity to Uniswap
2024-01-30 * "Add DAI-USDC liquidity for farming"
Assets:Crypto:Wallet:MetaMask:DAI -15000 DAI
Assets:Crypto:Wallet:MetaMask:USDC -5000 USDC ; Additional USDC
Assets:DeFi:Uniswap:DAI-USDC-LP 200 UNI-V3-DAI-USDC {100.00 USD}
Cross-Chain DeFi Operations
Bridging Assets
2024-02-05 * "Bridge ETH to Polygon"
Assets:Crypto:Wallet:MetaMask:ETH -5 ETH {2600.00 USD}
Assets:Crypto:Wallet:Polygon:ETH 5 ETH {2600.00 USD}
Expenses:DeFi:Bridge:Fees 0.01 ETH {2600.00 USD}
Assets:Crypto:Wallet:MetaMask:ETH -0.01 ETH {2600.00 USD}
Flash Loans and Arbitrage
2024-02-10 * "Flash loan arbitrage opportunity"
; Flash loan
Assets:Crypto:Temp:FlashLoan 100000 USDC
Liabilities:DeFi:Aave:FlashLoan -100000 USDC
; Arbitrage trade
Assets:Crypto:Temp:FlashLoan -100000 USDC
Assets:Crypto:Temp:Arbitrage 101500 USDC
; Repay flash loan
Liabilities:DeFi:Aave:FlashLoan 100000 USDC
Assets:Crypto:Temp:Arbitrage -100090 USDC ; Including fees
; Profit
Assets:Crypto:Wallet:MetaMask:USDC 1410 USDC
Income:DeFi:Arbitrage:Profit 1410.00 USD
DeFi Tax Reporting Considerations
Income Recognition
All DeFi rewards are taxable as ordinary income:
; Track all income sources separately
Income:DeFi:Yield:Uniswap ; LP fees
Income:DeFi:Yield:Compound ; Interest earned
Income:DeFi:Staking:Ethereum ; Staking rewards
Income:DeFi:Governance:Tokens ; Governance token airdrops
Income:DeFi:Airdrops ; Protocol airdrops
Expense Deductions
Track deductible expenses:
Expenses:DeFi:Gas:Ethereum ; Gas fees
Expenses:DeFi:Gas:Polygon ; Layer 2 fees
Expenses:DeFi:Interest:Aave ; Borrowing costs
Expenses:DeFi:ImpermanentLoss ; IL from LP positions
Capital Gains Tracking
Use lot-based accounting for accurate capital gains:
; Different cost basis for same token
Assets:DeFi:Compound:cUSDC 100 cUSDC {20.00 USD} ; Batch 1
Assets:DeFi:Compound:cUSDC 100 cUSDC {21.00 USD} ; Batch 2
Best Practices for DeFi Accounting
1. Real-Time Transaction Recording
- Record transactions immediately after execution
- Use transaction hashes for verification
- Monitor mempool for pending transactions
2. Gas Fee Optimization Tracking
; Track gas optimization strategies
Expenses:DeFi:Gas:Ethereum:Standard ; Standard gas price
Expenses:DeFi:Gas:Ethereum:Fast ; Fast gas price
Expenses:DeFi:Gas:Ethereum:Instant ; Instant gas price
3. Protocol Risk Management
; Track protocol-specific risks
Expenses:DeFi:Risk:SmartContract ; Smart contract failures
Expenses:DeFi:Risk:Liquidation ; Liquidation events
Expenses:DeFi:Risk:Slippage ; Slippage costs
4. Automated Reconciliation
- Set up automated price feeds
- Use protocol APIs for balance verification
- Implement automated transaction imports
5. Documentation Standards
- Maintain detailed transaction notes
- Document strategy rationale
- Keep protocol interaction records
Integration with DeFi Tools
Portfolio Tracking
- DeBank: DeFi portfolio overview
- Zapper: Multi-protocol dashboard
- Zerion: DeFi wallet and tracker
Tax Reporting
- Koinly: DeFi tax calculations
- CoinTracker: Multi-protocol support
- TokenTax: Specialized DeFi reporting
Analytics Platforms
- DeFi Pulse: Protocol analytics
- DeFiLlama: TVL and yield tracking
- APY.vision: Impermanent loss tracking
Conclusion
DeFi accounting complexity shouldn't prevent you from participating in the decentralized finance revolution. With Beancount.io's powerful plain-text accounting system, you can:
- Track Complex Transactions: Handle multi-protocol interactions seamlessly
- Ensure Tax Compliance: Proper income recognition and expense tracking
- Monitor Portfolio Performance: Real-time insights into DeFi positions
- Manage Risk: Track impermanent loss and protocol risks
- Scale Operations: From simple staking to complex yield farming strategies
The key to successful DeFi accounting is consistency, accuracy, and proper categorization. Start with basic protocols and gradually expand to more complex strategies as you become comfortable with the accounting patterns.
Ready to master DeFi accounting? Start your Beancount.io journey and take control of your decentralized finance portfolio today.
