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Posted Fri, 04 Feb 2022 17:59:38 GMT by Jacob
I'm looking for clarification when it comes to adding assets to a liquidity pool, for example, on Uniswap. At the moment, it looks like the capital gain tax rules are not clear and there are 2 main interpretations: a) disposal of assets should happen only on a difference between the assets when exiting a liquidity pool. For example, if I entered a pool with 1 ETH and 3000 USDC, but withdrew 0.9 ETH and 3300 USDC I should add disposal of 0.1 ETH and record an additional purchase of 300 USDC at the time of withdrawing liquidity b) disposal of assets should happen at the time of entering a liquidity pool when ETH and USDC are exchanged to liquidity provider (LP) tokens that represent the underlying liquidity. This would be a disposal of the full amount of ETH and USDC. Additionally, exiting a liquidity pool and exchanging LP tokens back to ETH and USDC would result in another disposal of LP tokens that might have appreciated in value (as they are backed 1:1 by the liquidity) I think that b) doesn't seem correct. My intention when providing liquidity was never to dispose all of my ETH and all of my USDC, but rather make my assets useful. In fact, if I knew this was even a remote possibility, I wouldn't have added liquidity in the first place. On top of this, liquidity provider tokens act as an IOU and can always be used for withdrawing underlying ETH and USDC, so I don't believe there should be a disposal of assets recorded at a time of entering a liquidity pool. I'd appreciate some clarification regarding liquidity pools and my interpretation of the guidelines.
Posted Mon, 07 Feb 2022 16:58:40 GMT by HMRC Admin 19
Hi,

You can see guidance here:

CRYPTO61130 - Decentralised Finance: Lending and staking: Making a DeFi loan

Thank you.
Posted Tue, 08 Feb 2022 12:55:00 GMT by Jacob
Unfortunately, none of the links provides clear information on what is classified as disposal when it comes to adding 2 assets into a liquidity pool and receiving LP tokens in exchange. On top of this, the language used in the guidance is misleading as it doesn't differentiate between lending protocols and decentralised exchanges. Are you able to clarify which of my interpretations is correct? Thank you.
Posted Thu, 10 Feb 2022 09:25:29 GMT by HMRC Admin 20
Hi Jacob,

You will need to consider the guidance at
CRYPTO61600 - Decentralised Finance: Lending and staking: Chargeable Gains: contents.
This provides guidance regarding DEFI and capital gains including
CRYPTO61620 - Decentralised Finance: Lending and staking: Chargeable Gains: Making a DeFi loan
which considers the position from a liquidity providers position, with
CRYPTO61650 - Decentralised Finance: Lending and staking: Chargeable Gains: Satisfaction of a DeFi loan and withdrawal of a stake
considering the position for the lender at the satisfaction of the loan.

There are some examples at
CRYPTO61670 - Decentralised Finance: Lending and staking: Chargeable Gains: Examples: contents

Thank you.

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