How to Report DeFi Yield in Pakistan: A Complete Tax Compliance Guide

Understanding DeFi Yield Taxation in Pakistan

Decentralized Finance (DeFi) has revolutionized how Pakistanis earn passive income through yield farming, staking, and liquidity mining. However, the State Bank of Pakistan (SBP) and Federal Board of Revenue (FBR) now require investors to report all crypto-related earnings, including DeFi yields. Under Pakistan’s Income Tax Ordinance 2001, DeFi profits are classified as “income from other sources” and taxed at standard income tax rates (5-35% based on annual income brackets). Failure to report can result in penalties up to 100% of tax owed plus criminal prosecution.

Step-by-Step Guide to Reporting DeFi Yield

1. Track All Transactions
   Use blockchain explorers (Etherscan, BscScan) and portfolio trackers (Koinly, CoinTracker) to document:
   • Date and time of yield receipt
   • Token name and quantity received
   • Market value in PKR at receipt time
   • Associated wallet addresses
2. Convert Yield to PKR Value
   Calculate fair market value using:
   • Average exchange rate on receipt date from Binance or LocalBitcoins
   • FBR’s prescribed conversion method for foreign income
3. File Through Iris Portal
   1. Log in to FBR’s Iris tax portal (iris.fbr.gov.pk)
   2. Select “Income from Other Sources” in tax return
   3. Enter total DeFi yield under “Foreign Income” section
   4. Attach transaction records as supporting documents
4. Pay Applicable Taxes
   Tax rates apply as per your income slab:
   • Up to PKR 600,000: 0%
   • PKR 600,001–1,200,000: 5%
   • PKR 1,200,001–2,400,000: 15%
   • Higher brackets up to 35%

Overcoming Common Reporting Challenges

Challenge 1: Volatile Crypto Valuations
Solution: Use first-in-first-out (FIFO) accounting method consistently. Document exchange rates from reputable sources at transaction time.

Challenge 2: Unclear Regulatory Guidance
Solution: Refer to SBP’s Crypto Assets Regulatory Framework (2021) and FBR Circular No. 07 of 2022. Consult FBR’s designated Crypto Tax Cell for clarification.

Challenge 3: Complex DeFi Protocols
Solution: Use specialized tax software that supports:

• Automated yield tracking across chains (Ethereum, BSC, Polygon)
• LP token valuation
• Impermanent loss calculations

Essential Record-Keeping Practices

• Maintain 5-year records of:
  • Wallet addresses and private keys (secured offline)
  • CSV exports from DeFi platforms
  • Bank statements showing fiat conversions
• Use hardware wallets for transaction signing logs
• Store screenshots of yield distribution events with timestamps

DeFi Tax Reporting FAQ

Q: Are stablecoin yields taxable in Pakistan?
A: Yes. All DeFi-generated income—whether in crypto or stablecoins—is taxable based on PKR value at receipt.

Q: How does FBR verify my DeFi earnings?
A: FBR uses blockchain analytics tools and requires exchanges to report large transactions. Discrepancies trigger audits.

Q: Can I deduct gas fees and platform charges?
A: Yes. Transaction costs directly related to yield generation are deductible expenses under Section 20 of Income Tax Ordinance.

Q: What if I earned less than PKR 400,000 annually from DeFi?
A: You must still file returns if your total income exceeds PKR 600,000. DeFi earnings alone below PKR 400,000 may qualify for tax exemption if other income is nil.

Q: How are airdropped tokens taxed?
A: Tokens received via airdrops are treated as income at fair market value on receipt date and subject to standard tax rates.