Water rights trading is a new way to increase farmers’ incomes and to narrow the gap between urban and rural areas, and it is also a long-term mechanism to achieve continuous increase in farmers’ incomes. This paper systematically reviewed the historical evolution of water rights trading, summarized the current situation and characteristics of water rights trading, analyzed the mechanism of water rights trading to increase farmers’ income, examined the practical difficulties in the process of empowerment, and proposed corresponding promotion paths. Results show that the evolution of the water rights trading system in China has gone through three stages: germination, stagnation, and exploration. As important participants in water rights trading, farmers can achieve profit growth in the process of participating in water rights trading by affecting operating income, transferring income, and reducing agricultural water costs. However, there are also some problems in the empowerment of farmers to increase the income of water rights trading, which are mainly manifested in the lack of coordinated efforts of the “two hands”, the full implementation of the reward and subsidy policy, the overall extensive water fee measurement model, and the lack of application and promotion of water rights trading. To further promote water rights trading to empower farmers to increase their incomes, it is necessary to promote the reform of water rights, stimulate the vitality of the water rights markets, clarify the standards of rewards and subsidies for water rights trading and the sources of funds, improve the measurement and monitoring facilities of agricultural water resources, and promote and innovate the form of water rights trading according to local conditions.