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Recap HomeCrypto Tax Guide (Lite)HMRC Cryptoassets Manual
  • A Technical Guide to Cryptocurrency Tax for UK Individuals
    • What are Cryptoassets?
    • Who are Recap?
  • CRYPTOCURRENCY TAX
    • Do I Need to Pay Tax on my Cryptoassets?
    • Which Taxes Apply?
      • Capital Gains Tax (CGT)
      • Income tax
      • VAT
      • Inheritance tax
      • Stamp Duty
    • How Much Tax Will I Pay?
    • New HMRC DeFi Guidance
      • Overview of HMRC guidance
      • 1️⃣Is the Reward Income or Capital?
      • 2️⃣Is Beneficial Ownership (BO) transferred?
      • 3️⃣Consider the Tax Treatment
        • Staker/Lender/Collateral Provider
          • Income Rewards
            • BO transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Income Reward
              • Example 1A
              • Example 2A
            • BO not transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Income Reward
              • Example 1B
              • Example 2B
          • Capital Rewards
            • BO transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Capital Reward
              • Example 1C
              • Example 2C
            • BO not transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Capital Reward
              • Example 1D
              • Example 2D
        • Borrower
    • Investor or Trader?
      • Badges of Trade Limitations
      • HMRC Approach
      • Court Cases involving Financial Traders
    • Capital Gains Tax
      • Calculating the Capital Gains Position
      • Disposal proceeds
      • Disposals to Connected Parties
      • Allowable costs for CGT
        • Exchange fees
        • Forks - affect on allowable costs
      • Capital Loss Claims
    • Income Tax
      • Financial trading income
      • Miscellaneous Income
      • Employment income
    • Fair Market Valuation
  • TRANSACTION TYPES
    • 💷Selling Crypto for Fiat
    • 🔄Trading Crypto to Crypto
    • 🛍️Purchases using Crypto
    • 🎁Gifts
    • 💍Spouse Transfers
    • 🎗️Gifts to Charity, CASCs & Bodies for a National Purpose
    • 🎈Airdrops
    • 🤝Staking
    • 💸Transfers
    • 🍴Forks
    • ⛏️Mining
    • 👛Employment income
      • UK Employer
      • Overseas employer
      • National Minimum Wage (NMW)
    • 🚨Lost & Stolen Crypto
    • 🎲Gambling
    • 💧Liquidity Pools
      • Example - Liquidity pool
    • ⬆️Token Upgrades/Swaps
    • 🔮Cryptoasset derivatives (CFDs, Futures and Margin Trading)
    • 💼Crypto Loans
    • 🔄REPOS
    • 🪞Reflections Rewards
    • 👥Referral Income
    • 💳Cashback
    • 🎨NFTs (Non Fungible Tokens)
    • 🎮NFTs earned playing games
  • Record Keeping
  • Filing Your Self-Assessment
    • How to Register for Self-Assessment
    • How to Fill In the Tax Return
    • Submitting the Tax Return and Paying the Tax
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On this page
  • Liquidity pool scenario - no beneficial ownership transfer
  • Reward income
  • Liquidity pool token
  • Change in principal tokens held

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  1. TRANSACTION TYPES
  2. Liquidity Pools

Example - Liquidity pool

Where there is no transfer of beneficial ownership when the tokens are added to the pool

PreviousLiquidity PoolsNextToken Upgrades/Swaps

Last updated 3 years ago

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Liquidity pool scenario - no beneficial ownership transfer

Example

A taxpayer puts in 5 ETH and 10 LNK into a liquidity pool. The 5 ETH and 10 LNK are exchanged for a ‘liquidity pool’ token that is redeemable when they withdraw from the liquidity pool. One month later, they withdraw from the liquidity pool and receive 3 ETH and 15 LNK in exchange for the ‘liquidity pool’ token. They also receive 15 USDC in rewards which they have decided is an .

There is no HMRC guidance on liquidity pools where there is no transfer of beneficial ownership at the time the tokens are added to the pool, so you would need to examine the details of the transactions you are undertaking to determine the tax treatment.

Reward income

As the , the 15 USDC rewards will be taxable as miscellaneous income, subject to income tax. The sterling value of the 15 USDC at the date of receipt will be the value of the miscellaneous income.

This same value is the CGT acquisition cost of the tokens; to be deducted from the proceeds of a later disposal of the tokens (which will be subject to CGT).

Liquidity pool token

In the example above, the receipt and redemption of the ‘liquidity pool’ token appears to be simply a claim/redemption mechanism, rather than the acquisition and disposal of a cryptoasset for tax purposes.

Therefore the receipt and repayment of the redemption token has been ignored for tax purposes.

Change in principal tokens held

Where the beneficial ownership of the 5 ETH and 10 LNK put into the liquidity pool is retained by the taxpayer, it seems clear that there is no disposal of these tokens for tax purposes.

In the example above, the taxpayer withdraws 3 ETH and 15 LNK from the liquidity pool, after putting 5 ETH and 10 LNK in the pool one month earlier. They now hold 2 less ETH and 5 additional LNK, compared with when they entered the liquidity pool.

The most logical tax treatment is that upon the exit from the pool, there is a taxable disposal of 2 ETH and an acquisition of 5 LNK. The disposal proceeds being equal to the sterling value of 2 ETH and the acquisition cost being the sterling value of 5 LNK; both at the date of withdrawal of the tokens from the pool.

💧
income reward
reward has the nature of income