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I have read the latest guidance on the tax treatment of lending to liquidity pools.
If I have understood it correctly, then as far as the daily reward payments are concerned, they should be treated as miscellaneous income since I am an individual investor, not a trader.
The pool I lend to effectively takes control of the 2 assets I lend (unlike staking), so I believe that the entry to the pool is considered a CGT disposal. Because the assets enter the pool at their current value, I believe I crystallise a gain or loss on that date, depending on whether my acquisition cost of the assets lent was higher or lower than the current cost. The pool token I receive in exchange for the 2 lent is valued at the sum of the current value of the 2 assets lent.
On exit from the pool, I believe I receive back the 2 assets lent at their current value. This triggers a CGT gain or loss for the pool token redeemed, depending on whether the pooled value of the pool token is less than, or more than the value of the 2 returned original assets.
If I have understood the rules correctly, it appears that they are designed to force a CGT gain or loss to be triggered both on entry to, and exit from an LP pool. The result of which is to bring forward the date of any CGT liability on assets lent to, and returned from LP pools to the date of entry or exit, rather than the date they are finally disposed of for GBP.
Clearly any CGT gain on the final disposal for GBP will be considerably less than if they had not been lent to an LP pool at all, I'll just have had to pay part of the CGT tax due earlier than if I hadn't lent them.
Moderator - please can you confirm that my understanding is correct, and please don't just point me at the latest published guidance (I've been there).
If you decide not to allow this post to be published, please can you tell me why, and what I need to alter to make it publishable.
Is there any information yet about how HMRC intend to tax rewards from lending cryptoassets to DeFi liquidity pools?
Will it simply be treated as income - the same as the current treatment of rewards from staking cryptoassets ?
When cryptoassets are withdrawn from liquidity pools it is extremely unlikely that the number of each asset returned will be the same as the number originally lent. Will this difference be treated as a sale or purchase of the asset, and give rise to a CGT liability ?
What records need to be kept ?
The rapid increase in these types of instruments and the volume of transactions within them mean that guidance is needed very quickly if individuals are to correctly record their activities to enable them to complete their 2021 self assessment forms.