Uniswap is a point-to-point decentralized cryptocurrency exchange that you can use to exchange ERC 20 tokens. The Uniswap exchange is different from a conventional exchange, such as Coinbase, in which a broker processes your transactions.
The tax code does not deal with the operation of taxes in Uniswap transactions. However, there are sufficient guidelines to allow the realization of some of the tax consequences of transactions on this exclusive Defi exchange. This article covers a comprehensive overview of how Uniswap Exchange works.
Understanding the technical and economic details behind the Uniswap platform does not pose the problem of this publication. This introduction is enough to gain the necessary understanding of the platform and apply the tax rules for various transactions.
If you are not familiar with cryptography, Uniswap is a pretty elusive concept. The easiest way to understand the Uniswap platform is to examine three elements liquidity, transactions, and commissions, that any cryptocurrency exchange needs and how Uniswap treats them differently.
First, Uniswap leverages the resources of its users to generate liquidity. This is achieved by allowing users to participate in liquidity groups. Its way of working is unique. If you want to partake in a liquidity fund, you mostly have to deposit ether and the corresponding amount of another ERC 20 symbol. At the same time, suppose that the price of 1 ET is 200 USD. If you wish to participate in the ETH / cDAI liquidity group, deposit 1 ETH and 200 cDAI, provided that the price of 1 cDAI is 1 USD. Your deposit in US $ costs $ 400. Once the pair is paid, they will receive a Uniswap liquidity symbol, called "UNI-V1", which represents the deposit fee.
You may be wondering why someone should offer liquidity. The Uniswap platform charges a fixed fee of 0.3% when users exchange ERC 20 tokens (also called swaps). Liquidity providers earn a proportionate share of these transaction costs, depending on the amount of liquidity provided. On a central exchange like Coinbase, these transaction costs would have been made public. It will not be distributed to participants.
After depositing your first pair in the liquidity group, the initial deposit rate may vary depending on your business. Following the example above, more or less ETH or cDAI can be added to the group through regular business activities of other group members. ETH / cDAI. This would have a proportional effect on the initial deposit rate of 1:1. In the example above, if you leave the first deposit on the platform for a period, you can see 1.2 ETH at 150 cDAI. This relationship is continually evolving.
Another different aspect of Uniswap compared to a standard exchange is that the exchange rate of the chips on the platform is determined by the percentage of funds deposited in a specific group. Instead, traditional exchanges determine the price of tokens in dollars based on supply and demand. Supply and demand are presented in the order book.
Finally, liquidity providers can remove their funds by using liquidity marks (UNI-V1). When accessing funds, their initial deposit rate has likely changed due to trading activities on the platform.
Using Uniswap is more complicated than operating via a clearinghouse (or decentralized center) with a traditional order book. Before considering the tax implications, you need to know how Uniswap works.
Daniel P Vigilante CPA and Profit Consultants