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South African Tax Guide
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  • Cryptocurrency Tax Guide for South African Individuals
    • Recap
    • Tax Consulting South Africa
  • Cryptocurrency tax
    • Is Cryptocurrency Taxed in South Africa?
      • Tax Deadlines
    • Which Types of Taxes Apply?
      • Income Tax
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    • Investor or Trader?
      • How to Know The Difference
    • Valuation of Crypto Assets
  • How To File Your Return
    • Record Keeping
    • Filing Your Tax Return
  • Transaction Types
    • πŸ’΅Selling Crypto for Fiat
    • πŸ“ˆTrading Crypto for Crypto
    • πŸ—³οΈHolding Crypto
    • πŸ”„Swapping Crypto
    • πŸ›οΈPurchases Using Crypto
    • 🎁Gifts to Other Persons
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    • πŸ’ΈTransfers Between Wallets
    • 🀝Staking
    • ⛏️Mining
    • πŸ‘›'Employment Income'
    • 😰Lost / Stolen Crypto
    • 🌊Liquidity Pools
    • πŸ–ΌοΈNFTs
    • πŸ’°DeFi Interest / Rewards
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On this page
  • What Are Liquidity Pools
  • Tax Treatment
  • Example
  1. Transaction Types

Liquidity Pools

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Last updated 2 years ago

What Are Liquidity Pools

Liquidity pools, predominantly used in (Decentralized Finance), are a pool or pair of cryptocurrencies locked in a smart contract to allow users to lend or borrow crypto assets to other users.

Without liquidity pools DeFi would not exist, as they are the backbone of decentralized exchanges and platforms, removing the need for a centralized 'market maker' such as Binance or KuCoin.

Tax Treatment

  • We will assume interest received from liquidity pools is seen as crypto income, similar to interest from a bank.

As liquidity pools are simply decentralized lending platforms, the treatment should be the same as DeFi interest or rewards.

Example

Deciding to take her Bitcoin off a centralized exchange, Nataly sent it to a DeFi liquidity pool hoping to earn some rewards from her stake.

Locking in a 3-month stake for 13% APR guaranteed, she forgot about it. Her locked Bitcoin had a value of R95,000 at the time of locking.

It is currently unclear whether SARS tracks a crypto assets cost basis at the time earned or at the time claimed.

Her total reward from providing liquidity was R3,088 (R95,000 * 13% / 4)

As she will be seen as an investor, Nataly will be fully taxed on her R3,088 crypto income.

Total Tax Payable: R555 (R3,088 * 18%)

Similar to our treatment, we must base our assumptions on previous rules written by SARS.

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DeFi interest
DeFi