Introduction
Aave is a decentralized finance (DeFi) protocol that enables users to lend, borrow, and earn interest on crypto assets without intermediaries. Its native token, AAVE, plays multiple roles — from governance voting to staking and protocol incentives. For Canadians participating in Aave’s ecosystem, these activities may seem novel, but the tax treatment is governed by established CRA rules on digital assets and income reporting.
This article explains how Canadian users should report AAVE-related activity — including lending, borrowing, governance, and token rewards.
Buying and Holding AAVE
Purchasing AAVE with Canadian dollars is not taxable at the time of purchase. However, you must record the acquisition date, token amount, and total cost (including fees) to establish your adjusted cost base (ACB). When AAVE is later sold, exchanged, or used in DeFi, your gain or loss will be based on this ACB.
If AAVE is received in exchange for another crypto asset (such as ETH), the transaction is a taxable event, and the fair market value in CAD must be used to determine capital gains or losses.
Lending Crypto Through Aave
Depositing tokens into Aave’s liquidity pool allows users to earn interest. This interest, usually paid in real-time through aTokens or other reward structures, is considered income at the time it’s received. The CRA expects that any increase in your token balance or receipt of new tokens be reported at their fair market value in Canadian dollars.
Tracking DeFi rewards can be complex, especially when earnings accrue automatically. However, CRA guidance indicates that all earned crypto — whether from lending, yield farming, or interest — is taxable when received, even if not withdrawn.
Borrowing Against Crypto Collateral
Borrowing crypto through Aave does not trigger tax on its own. However, if the borrowed funds are used for investments that generate income, or if the collateral is liquidated due to price volatility, taxable events may arise. In particular, forced liquidations can result in capital gains or losses based on the value of the collateral at the time it is sold by the protocol.
Any fees or interest paid on crypto loans may be deductible only if used for income-generating purposes and properly documented.
Staking and Governance Participation
AAVE holders can stake tokens in the Safety Module to secure the protocol and earn rewards. These staking rewards are considered taxable income when received. Later, if staked AAVE is sold or exchanged, any change in value since the time of receipt results in a capital gain or loss.
Participating in governance (e.g., voting on Aave Improvement Proposals) does not create a tax obligation. However, if incentives are offered for governance activity, those rewards must be reported as income.
Selling, Swapping, or Spending AAVE
Selling AAVE for fiat, trading it for another token, or using it for payment purposes constitutes a disposition. You must calculate the capital gain or loss by subtracting your ACB from the token’s fair market value at the time of the transaction.
Since DeFi platforms often batch transactions or involve gasless voting, it's important to track token flows closely and maintain off-chain records to back up your reporting.
Conclusion
Participating in Aave offers flexibility and yield potential, but every token movement carries a tax footprint. From lending rewards to collateral liquidations, Canadian users must document and report AAVE activity with care.
Block3 Finance helps Canadians navigate the tax side of DeFi — including lending platforms like Aave. We ensure your AAVE transactions are correctly valued, categorized, and fully CRA-compliant.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.