INSIGHT

Top 8 DeFi transaction accounting best practices 

Mary Gillis, Javier Salinas • July 25, 2025

Services: Blockchain & digital assets, Outsourced Accounting Industries: Blockchain & Digital Assets

---

In decentralized finance (DeFi), businesses encounter a distinct set of challenges related to accurate accounting and regulatory compliance. Unlike traditional financial systems, DeFi transactions—ranging from yield farming and liquidity providing to flash loans, staking rewards, and the use of smart contracts—occur across multiple blockchains and platforms.  

This decentralized nature, combined with the complexity of digital assets, DeFi tokens, and liquidity pool (LP) positions, makes it essential for financial institutions and organizations to implement robust DeFi accounting practices. 

As DeFi protocols and platforms continue to transform financial services, ensuring accurate records, reliable transaction history, and fair market value assessments is critical for tax compliance and supporting business growth.  

8 best practices for DeFi accounting 

Whether you’re tracking transaction fees, capital gains, or the total value of your crypto assets, adopting specialized tools and sound record-keeping will help you stay compliant while unlocking the full value of your DeFi activities. 

1. Implement robust transaction tracking systems 

In the decentralized finance (DeFi) space, financial transactions span multiple blockchains, protocols, and decentralized platforms. The decentralized nature, combined with the rapid growth of digital assets, makes manual record-keeping nearly impossible for accurate accounting and regulatory compliance.  

To help ensure compliance, maintain accurate records, and support business growth, it’s essential to implement a robust transaction tracking system that addresses the unique challenges of DeFi transactions. 

Look for:  

• Automated data capture: Use specialized tools or software that integrate directly with blockchain technology to automatically track and record all DeFi transactions in real time. This includes swaps, liquidity providing, staking rewards, lending, and more. 
• Cross-chain visibility: Ensure your system provides visibility across all blockchains and DeFi protocols where you operate—including Layer 2 solutions, sidechains, and major networks like Ethereum, Polygon, and Binance Smart Chain. This is crucial for businesses operating on multiple blockchains or using both centralized exchanges and decentralized exchanges.  
• Transaction categorization: Automatically classify transactions by type—such as swaps, liquidity pool additions/removals, staking, yield farming, NFT purchases, and more. Proper categorization supports accurate accounting, tax compliance, and fair market value assessments. For instance, DeBank and Integral can sort transactions and provide detailed breakdowns by protocol, asset, and activity.  

Your transaction tracking system should also provide a complete audit trail with timestamps, wallet addresses, token quantities, USD values, and transaction hashes for every DeFi interaction. 

2. Document your accounting policies 

Establishing clear, written accounting policies is essential for any organization operating in the decentralized finance (DeFi) space. Comprehensive documentation ensures accurate accounting, supports regulatory compliance, and provides a strong defense during audits or tax examinations. Consider: 

Asset Classification 

Clearly define how you classify digital assets, DeFi tokens, LP tokens, and non-fungible tokens (NFTs).Most crypto assets are treated as intangible assets under current accounting standards, but some may qualify as investments or, in rare cases, as financial assets depending on their characteristics and use. 

For example, tokens used for liquidity providing or staking rewards are typically classified as intangible assets, while assets held for trading on decentralized exchanges may be considered investments. 

Revenue Recognition 

Specify when and how to recognize income from DeFi activities such as yield farming, liquidity pool participation, staking rewards, and lending. Revenue recognition in DeFi can be complex due to the continuous and automated nature of smart contracts. Policies should align with established standards (e.g., ASC 606 or IFRS 15), recognizing revenue when it is earned and measurable. 

For instance, income from providing liquidity to a pool should be recognized as it accrues, while rewards from yield farming are recognized when received or claimable. 

Fair Value Determination 

Establish robust methodologies for determining the fair market value of DeFi positions, LP tokens, and other digital assets. Fair value is typically defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. 

Use observable market data from reputable decentralized platforms or price oracles when available. For illiquid assets, document the valuation techniques and inputs used, such as discounted cash flows or comparable market transactions. 

Cost Basis Calculations 

Define and document the method used to calculate the cost basis for DeFi transactions—such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or Specific Identification. FIFO and Specific Identification are generally accepted for tax compliance in the U.S., while other methods may be used for internal reporting or in other jurisdictions. 

Maintain detailed transaction history and accurate records to support your chosen method, especially when operating across multiple blockchains and DeFi protocols. Well-documented policies provide consistency across reporting periods and defend your approach during audits or tax examinations. 

3. Master fair value measurement 

Determining fair market value for DeFi positions is a critical aspect of accurate accounting, tax compliance, and regulatory reporting. Here’s how to approach fair value measurement for various DeFi activities.  

• Liquidity pool positions: Calculate the fair value of liquidity pool (LP) tokens based on the current market value of the underlying assets plus any accumulated transaction fees. Adjust for impermanent loss, which can impact the total value of your position due to price fluctuations between the paired assets. Use real-time data from decentralized exchanges and price oracles to ensure accurate records and fair market value reporting 
• Yield farming positions: Value yield farming positions by considering both the staked assets and any accrued but unclaimed rewards. The fair value should reflect the total value of assets locked in smart contracts, as well as the market price of any additional tokens or rewards earned. Automated tools and dashboards can help track these values across multiple blockchains and DeFi platforms, supporting accurate accounting and tax compliance. 
• Governance tokens: For governance tokens and other DeFi tokens, use volume-weighted average prices from reputable decentralized exchanges or data aggregators with sufficient liquidity. This approach ensures that your valuation reflects fair market value and aligns with best practices for financial transactions in the DeFi space.  
• Derivatives and options: When valuing DeFi derivatives or financial options, apply appropriate option pricing models and adjust for DeFi-specific risks such as protocol vulnerabilities, liquidity constraints, and market volatility. Document all assumptions and inputs used in your calculations to ensure transparency and support regulatory compliance.  

As a general rule of thumb, use observable market data whenever possible, such as prices from decentralized exchanges, blockchain transaction history, and third-party price feeds. This aligns with the fair value hierarchy, prioritizing Level 1 and Level 2 inputs over unobservable Level 3 inputs 

Document your valuation methodology and maintain records of all inputs and calculations used to determine fair value at each reporting date. 

4. Separate economic activities 

In decentralized finance (DeFi), a single transaction often involves multiple economic activities—each with unique accounting and tax implications. A single DeFi transaction can include: 

• Asset Exchange: Swapping one DeFi token or crypto asset for another, often on decentralized exchanges. This is typically a taxable event, potentially resulting in capital gain or loss. 
• Investment: Providing liquidity to a pool or protocol, which may involve receiving LP tokens representing your share of the pool. This is an investment activity and may affect your cost basis and future capital gains. 
• Revenue Generation: Earning transaction fees, incentive tokens, or staking rewards as a liquidity provider or participant in yield farming. These are generally recognized as ordinary income at the time they are received or claimable. 

Break each transaction into its component parts for proper accounting. This “substance over form” approach ensures each economic activity receives appropriate treatment despite being executed in a single blockchain transaction. 

5. Account for gas fees appropriately 

Gas fees are a core part of DeFi transactions, directly impacting the cost and efficiency of interacting with decentralized platforms, smart contracts, and blockchain technology. Apply these best practices: 

Capitalize gas fees for asset acquisition 

When gas fees are incurred to acquire digital assets—such as purchasing DeFi tokens, providing liquidity, or minting NFTs—add these fees to the cost basis of the asset. This increases your cost basis, which can reduce future capital gains when the asset is sold or swapped. 

Expense gas fees for income-generating activities 

Gas fees paid to claim staking rewards, harvest yield farming income, or receive airdrops should be expensed against the related income. This approach aligns with how transaction fees are treated in traditional finance and supports accurate accounting for DeFi activities. 

Allocate gas fees proportionally for multi-purpose transactions 

If a single transaction serves multiple purposes—such as swapping tokens and providing liquidity in one step—allocate the gas fees proportionally based on the value or nature of each activity. This ensures each component is accurately reflected in your transaction history and financial record.  

Keep in mind that gas fees paid in cryptocurrency (e.g., ETH) are considered a disposal event, potentially triggering a capital gain or loss on the asset used to pay the fee. Always track the fair market value of the crypto used for gas at the time of the transaction and adjust your cost basis accordingly. 

For business or professional DeFi activities, gas fees may be deductible as a business expense. For personal investments, they typically adjust the cost basis but are not directly deductible. Always report gas fees on relevant tax forms (e.g., IRS Form 8949 in the US) and maintain accurate records for each blockchain transaction.  

6. Apply consistent tax lot identification methods 

Choosing the right tax lot identification method is essential for accurate accounting, tax compliance, and optimizing your capital gains or losses in the decentralized finance (DeFi) space.  

The method you select determines how gains and losses are calculated when you sell, swap, or otherwise dispose of digital assets, DeFi tokens, or LP tokens across multiple blockchains and DeFi platforms. 

Common methods include: 

• First In, First Out (FIFO): This method assumes the oldest units of your crypto assets are sold or exchanged first. FIFO is straightforward and often the default for many accounting systems. In a rising market, FIFO can result in higher taxable gains, as older assets typically have a lower cost basis. 
• Specific Identification: With this approach, you identify the exact units being disposed of by wallet, acquisition date, and cost basis. This method offers flexibility and can be used to strategically match sales to specific purchases, potentially minimizing your tax liability. However, it requires meticulous record keeping, including dates, amounts, wallet addresses, and fair market values for each transaction. 
• Highest In, First Out (HIFO): HIFO assumes the highest-cost units are sold first, which can minimize taxable gains and reduce your overall tax burden. This method is particularly useful for active traders or businesses managing large portfolios of digital assets. Like specific identification, HIFO requires detailed tracking and is only allowed if you can substantiate each transaction.  

Select a method that aligns with your overall tax strategy, document your choice, and apply it consistently across all DeFi platforms. 

7. Create a comprehensive reconciliation process 

Regular reconciliation prevents discrepancies between your accounting records and on-chain activity. Here’s what this could look like: 

• Weekly wallet reconciliations: Compare your recorded wallet balances to actual on-chain holdings across all blockchains and DeFi platforms. This step ensures your transaction history and digital asset records are up to date, helping you quickly identify missing or duplicate entries, unauthorized transactions, or errors in your financial transactions. 
• Monthly protocol reconciliations: Verify your positions in liquidity pools, lending platforms, staking contracts, and other DeFi protocols. This includes confirming the value of LP tokens, staking rewards, and yield farming positions, as well as checking for any unclaimed rewards or changes in your DeFi positions. 
• Quarterly comprehensive reviews: Conduct a deep reconciliation of all DeFi activities, including cross-chain transactions, flash loans, and complex financial options. This comprehensive review should match your general ledger, transaction history, and cost basis calculations against blockchain data, ensuring your records reflect the true state of your digital assets and DeFi tokens. 

Automated reconciliation tools can compare your general ledger balances with blockchain data, flagging discrepancies for investigation. 

8. Develop appropriate disclosure frameworks 

Enhanced disclosures help financial statement users, regulators, and stakeholders understand the nature, risks, and performance of your DeFi activities, including: 

• Nature and purpose: Explain why you engage in DeFi activities and how they support business objectives 
• Risk exposures: Disclose smart contract, counterparty, market, liquidity, regulatory, and impermanent loss risks 
• Fair value hierarchy: Classify DeFi positions within the fair value hierarchy (Level 1, 2, or 3) based on the observability of inputs used in valuation.  
• Disaggregated performance: Present returns and performance metrics separately for each major DeFi strategy (e.g., yield farming, lending, liquidity provision). Provide details on income sources and include historical performance data, volatility measures, and any significant events. 

For crypto assets that qualify under ASC 350-60, follow the specific presentation and disclosure requirements for fair value reporting, including the name, cost basis, fair value, and number of units for each significant holding. 

Transform your DeFi accounting with BPM 

From implementing automated tracking solutions to developing custom accounting policies, our team supports companies at every stage of DeFi adoption. We help translate complex on-chain activities into properly structured financial records that satisfy both compliance requirements and management information needs. 

Contact BPM today to ensure your DeFi activities receive the specialized accounting treatment they require.