🌊Liquidity Pools

What Are Liquidity Pools

Liquidity pools, predominantly used in DeFi (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

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

• 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%)