Launched in 2018, Uniswap has now become a go-to exchange for swapping cryptocurrencies but are transactions (tx/txs) on Uniswap taxable? Since crypto trades are also taxable, we’re sure you would’ve wondered if Uniswap transactions are taxable too.
We’re here to answer that for you. Crypto trades on any platform are subject to taxes, and Uniswap is no exception. Nevertheless, crypto taxes are often ambiguous as there is no defined set of rules and regulations to govern crypto trades. This makes filing taxes a lot more complex.
Don’t worry; this article has got your back. We will walk you through everything about Uniswap and taxes in a simple to understand way.
What is Uniswap?
Before we dive into taxes, it is necessary to familiarize ourselves with Uniswap.
Uniswap is a Decentralized-Exchange (DEX) for automatically swapping ERC-20 tokens. You can exchange Ethereum-based assets and contribute liquidity while earning commissions. The liquidity provider incentives are distributed from the trading fees on the platform.
Uniswap & Taxes
Digital currencies are identified as a ‘property’ by the Internal Revenue Service (IRS), the United States, as it is by other international tax authorities too.
As a result, general property tax rules are also applicable to cryptocurrencies. Yes, all transactions on Uniswap are subject to taxes. However, U.S. tax regulations do not attach gas fees in taxable proceeds.
For instance, if you sell 1 ETH for $350 and spend $5 on gas fees, your taxable earnings would be $345.
Nevertheless, there is no specific set of laws that directly regulates Uniswap – which means that we have to follow the IRS’s general tax guidelines for cryptocurrencies. To understand the taxable events, we have divided them into three parts.
Adding Liquidity and Taxes
Adding Liquidity to Uniswap Pools and Receiving UNI-V1 tokens
When you contribute liquidity to the Uniswap liquidity pool, you receive UNI-V1 tokens proportional to your share in the liquidity pool.
There are two positions for taxing this liquidity:
- It can be argued that UNI-V1 tokens represent your deposits (property) and do not qualify as “new” property. This way, the tokens can’t be taxed.
- You can also add liquidity as a taxable event if the UNI-V1 tokens are perceived as a new property. And as the crypto-to-crypto trades are taxable as per the IRS, you are liable to pay taxes for adding liquidity.
Removing Liquidity and Taxes
When you remove your share of the pool by burning UNI-V1 tokens, a taxable event occurs. You would have either made a profit or loss on your deposit.
The difference between the fair market value (FMV) of your withdrawal and the cost basis of your deposits leaves you with a capital gain or a loss, this amount would then be taxed.
Trading and Taxes
As discussed earlier, the IRS has mentioned that crypto-to-crypto trades are taxable. The gain or loss is the difference between the FMV of value received, and the cost basis of the tokens exchanged.
Receiving Liquidity Provider Incentives
Uniswap charges a 0.3% fee for exchanging tokens. This fee is distributed to liquidity providers proportional to their pool share. If you are a liquidity provider, your incentives are taxable. These commissions can be taxed as interest income or rental income.
As cryptocurrencies are still evolving, there is a lot of ambiguity around crypto taxes. Plus, it is tough to apply existing taxation rules to cryptocurrency transactions. Thus, it is better to stay updated about tax reforms around cryptocurrencies.
Most importantly, you should maintain your crypto records, such as sales, exchanges, transaction receipts, etc. This would help you in filing tax returns.