How does tax work when providing liquidity to DeFi pools?

[riot]

I just started providing liquidty to a DeFi pool (Flamingo on the NEO blockchain).

However I'm trying to get my head around how the tax would work, these are the steps I took - which ones would create a taxable event?

1. Convert a token into another token which have prices pegged to each other (NEO > nNEO)
2. Same as above but for another token (GAS > cGAS)
3. Convert the above two new tokens (nNEO & cGAS into) into a third: FLP-cGAS-nNEO
4. Stake FLP-cGAS-nNEO which earns me interest in another token (Flamingo)
5. Convert Flamingo token into two more tokens fUSDT & nNEO then convert that into FLP-nNEO-fUSDT and stake it which earns me more Flamingo
6. Unstake FLP-nNEO-fUSDT & FLP-cGAS-nNEO back to nNEO, fUSDT, cGAS & nNEO
7. Convert nNEO, fUSDT, cGAS & nNEO & Flamingo all into NEO
8. Swap NEO into USDT
9. Swap USDT into GBP

Yikes! What a lot of steps! Starting small with about £40.

What's annoying is there doesn't seem to be a way to export all the trades in the Flamingo DeFi platform. So where usually I'd export the trades and import them into some software which calculates how much I made. In this case I have to write it all down as I go.

 

[heartnsoul19]

@riot

1. Convert a token into another token which have prices pegged to each other (NEO > nNEO)

Taxable disposal for CGT.

1. Same as above but for another token (GAS > cGAS)

Taxable disposal for CGT.

1. Convert the above two new tokens (nNEO & cGAS into) into a third: FLP-cGAS-nNEO

Taxable disposal for CGT.

1. Stake FLP-cGAS-nNEO which earns me interest in another token (Flamingo)

Taxed as income at your marginal rate.

1. Convert Flamingo token into two more tokens fUSDT & nNEO then convert that into FLP-nNEO-fUSDT and stake it which earns me more Flamingo

Taxable disposal for CGT at each step then staking reward taxed as income at your marginal rate.

1. Unstake FLP-nNEO-fUSDT & FLP-cGAS-nNEO back to nNEO, fUSDT, cGAS & nNEO

Taxable disposal for CGT at each step

1. Convert nNEO, fUSDT, cGAS & nNEO & Flamingo all into NEO

Taxable disposal for CGT at each step.

1. Swap NEO into USDT

Taxable disposal for CGT.

1. Swap USDT into GBP

Taxable disposal for CGT.

 

[riot]

@heartnsoul19 Thanks, what a headache! I own a coin called NEO which earns GAS which I only get when I download a wallet and click "claim".

Would this GAS count as income tax? And am I taxed on the value of it when I earn it or claim it?

 

[heartnsoul19]

@riot Yes, and you are taxed when you earn it regardless of when you claim it.

 

[riot]

@heartnsoul19 Thanks, so theoretically if it's worth £100 and your income tax is 40% you'd pay £40 even if by the time you claim it it's worth £5?

 

[heartnsoul19]

@riot Yes, this is the bane of my life whenever a bear market comes as a miner because if I get paid when I'm asleep I end up paying tax on more income than I actually end up being able to realise

 

[riot]

@heartnsoul19 Yea old tax system I guess! If you're mining rig is constantly earning do you chunk these together for tax reasons? As a liquidity miner you're earning every second so that would be a lot of lines in a spreadsheet!

I was also thinking if going from one token into another which is pegged to the first is a taxable event doesn't that mean I could switch back and forth in a bear market to harvest large paper losses which could be used to offset gains?

 

[heartnsoul19]

@riot To be accurate with the tax calculations, if you're paid every second then technically yes you need to account for every second. At that point though the rate limiting step becomes the polling rate of the exchange rate so you only need to account for the payments which have accrued by each time the price against GBP changes. This is indeed still a lot of entries though if you want to be accurate!

I deliberately use a mining pool which pays out daily so that I only need one entry per day. People using Nicehash must contend with payouts every 4 hours which is 6x as much work on the accounting side

I was also thinking if going from one token into another which is pegged to the first is a taxable event doesn't that mean I could switch back and forth in a bear market to harvest large paper losses which could be used to offset gains?

This would work on paper but you'd be opening yourself up to a HMRC tribunal who would inevitably find in HMRCs favour. You can safely account for any losses which occur this way through what you're doing to ultimately make some money, but any attempt to deliberately make a paper loss this way would be seen as not in line with the spirit of the rules.

 

[riot]

@heartnsoul19 Thanks that's great feedback. I only have around £50 in liquidity, I honestly don't think it's worth the trouble with all the taxing pain!

 

[heartnsoul19]

@riot Lol I would say I agree.

That said if you don't make more than £1000 in gross income revenue, and no more than £13000 gross from sale of assets in doing it and have no other side hustle to use those allowances then just use your trading allowance rather than working it out properly.

 

[riot]

@heartnsoul19 Thanks, worth keeping in mind! My big returns have always been made by following the fundamentals and being patient!

 

[jodiw]

@heartnsoul19 Jumping on someone else’s thread, but can rewards from staking etc. be counted towards the £1k personal savings allowance?

 

[uriel_1]

@jodiw Not the personal savings allowance unless the staking is in the nature of interest and you are open to arguing with HMRC in Tribunal about the nature of interest, but you can put it into the trading and miscellaneous £1k allowance (although HMRC might argue it comes under "annual payments" rather than "miscellaneous" if you want that argument).

 

[jodiw]

@uriel_1 Thank you, you’ve given me areas to look into. I figured it wouldn’t be so simple.

 

[modernjonah]

@riot I believe at least 1, 2, 3, part of 5, 6, 7 & 8? The staking bits I don't remember off the top of my head