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Understand liquidity pool transactions

A liquidity pool is a smart contract that combines funds from multiple liquidity providers to supply market liquidity. These pools help enable decentralized trading and lending of crypto assets. Liquidity Providers (LPs) typically receive a token or rights representing their share of the pool. In return, LPs earn rewards, often in the form of interest or other incentives, for locking up their crypto.

To ensure accurate tracking and reporting of liquidity pool transactions, use the appropriate categories for qualifying transactions:

  • Add liquidity: Applied when you contribute assets to a liquidity pool and receive a LP token in return. This can be applied to Trade transactions. 
  • Remove liquidity: Applied when you redeem your liquidity by returning an LP token. This can be applied to Trade transactions.

Set liquidity pool transactions as non-taxable

You can choose to treat liquidity pool transactions as non-taxable (add liquidity or remove liquidity) in your CoinTracker tax settings. We recommend consulting a tax professional before changing your tax settings, as tax implications can be complex and vary by country and other factors.

When treated as non-taxable:

  • The cost basis of outgoing tokens (used to add liquidity) transfers to the incoming token when liquidity is removed.
  • The cost basis also accounts for the transaction fee.
  • The acquisition date for added assets is the date they are removed from the liquidity pool, as shown in the transaction date.

How to update your tax settings

  1. Navigate to the Settings page.
  2. Select the Tax tab.
  3. Toggle on Treat liquidity pool transactions as non-taxable.
  4. Select a start date.
  5. Select an end date (optional), then select Next.
  6. Review your selection and select Confirm & save to finish.

To turn off this setting, toggle it off. 

What to keep in mind 

  • If a transaction is tagged as non-taxable but occurs before the effective non-taxable date, it will be treated as a taxable event.
  • You can manually override the tax treatment for specific transactions to cater to unique situations or to comply with past tax filings.

Example: Multi-inflow, multi-outflow transactions

If you:

  • Add liquidity on 12/1/2022. 
  • Remove liquidity on 5/1/2023. 
  • Sell liquidity on 2/7/2023. 
The acquisition date for ETH and WBTC becomes 5/1/2023.

If there’s missing price history for one or more inflows, the total cost basis is evenly distributed across all incoming entries. You’ll be prompted to provide the missing price data for more accurate cost basis allocation.

Disclaimer: CoinTracker is provided for informational purposes and is not intended as tax, audit, accounting, investment, financial, or legal advice. For financial, tax, or legal advice, please consult your own professional. See our full disclaimer.

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