Yield Farming Tax UK: LP Tokens, Reward Emissions and HMRC's Three-Event Rule

Yield farming looks like one activity but generates three distinct UK tax events. The reason most yield farmers under-report — or worse, double-count — is that they treat the whole position as a single line on Self Assessment. HMRC wants the entry, the ongoing rewards, and the exit reported separately. Here is how.

Event 1: entering the farm (disposal of inputs)

Depositing ETH and USDC into a Uniswap v3 LP, or wrapping into a Curve gauge, or bonding into a Convex pool is a disposal of both input tokens. The proceeds figure for each is the GBP market value of the LP token or gauge receipt you receive in exchange, apportioned by the pool weight at deposit time. The LP token starts a new Section 104 pool with a cost basis equal to the combined GBP value of the deposit.

This is the step most often missed. Filers tend to think of the deposit as "still my ETH and USDC, just earning yield" — but HMRC treats the LP position as a different asset with different rights.

Event 2: ongoing reward emissions (income)

Every reward emission — whether it is CRV, CVX, AURA, or the protocol's native token — is miscellaneous income at the GBP value at the moment it accrues to you. For continuous emission protocols (Aave-style), most filers use a periodic snapshot approach: take the unclaimed reward balance at week-end, sum the increments, value them at week-end GBP prices.

The income figure also becomes the cost basis when you later sell the reward tokens. So if you claim 10 CRV at £0.50 each, you have £5 of income and £5 of cost basis. Selling those 10 CRV later at £0.80 produces a £3 capital gain.

Event 3: exiting the farm (disposal of LP token)

Withdrawing your liquidity is a disposal of the LP token at its current GBP value, and an acquisition of the underlying tokens at their current GBP value. The gain or loss on the LP position is the GBP value at withdrawal minus the pool average from event 1.

Impermanent loss is realised at this point. If you put in £5,000 of ETH+USDC and withdraw £4,500 of ETH+USDC, the £500 loss is a CGT loss on the LP token and is claimable.

Why this matters for HMRC accuracy

If you only report the net result (final value minus initial value), you have hidden the reward income from HMRC. Income tax and CGT have different rates and different allowances. Two filers with the same net return can owe materially different amounts of tax depending on how the components are split.

CryptoLens enumerates the three events per farm position, attaches block-time GBP values, and presents reward emissions and LP gains as separate SA108 rows.