A liquidity pool is a smart contract that combines funds from multiple crypto users to provide 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.
Tax treatment for liquidity pool transactions
By default, transactions categorized under Add Liquidity or Remove Liquidity are treated as taxable events. However, you can change these default settings to treat them as non-taxable.
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.
To change the default settings:
- Navigate to Settings.
- Click the Tax tab.
- Click Treat liquidity pool transactions as non-taxable, and toggle on.
- Select a start date.
- Select an end date (optional), then click Next.
- Review your selection and click Confirm & save to complete this process.
To turn off this setting, follow the above steps and toggle the feature off.
Additional considerations
- 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.
Multi-inflow, multi-outflow example
If you:
- Add liquidity on 12/01/22
- Remove liquidity on 05/01/23
- Sell liquidity on 2/07/2023
The acquisition date for ETH and WBTC becomes 05/01/2023.
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: This information is for informational purposes only and should not be considered legal, tax, or financial advice. Please consult a tax professional for specific guidance.