Uniswap is a decentralized crypto exchange that gives users the capacity to trade ERC 20 tokens. This is a unique exchange that stands out from traditional exchange, such as coinbase, in which an intermediary needs to process your transaction.
There has not been a specific tax code that takes care of the tax process for Uniswap. There are, however, adequate information to deduce the tax implications of using it. We will explore the concept of Uniawap exchange and what to expect from each transaction.
The Unisawp platform is a pretty technical one, and the details are beyond the scope of this post. Anyone interested in the basics and underlying principles of uniswap should get more information as published on their website.
For people new to the crypto world, Uniswap might appear as a pretty confusing concept. To understand the platform, however, we recommend examining three significant concepts that are important to all crypto exchanges. (trading activities, liquidity, and fees) Also, understanding how what Uniswap is doing differently matters.
Uniswap gives users the chance to take part in liquidity pools. As a result, user's funds are significant to liquidity on the platform. This works in a particular manner. If you are interested in being part of the liquidity pool, you need to deposit ether alongside an equivalent amount of other ERCC 20 token. For instance, if the price of 1 ETH is $250, and you want to participate in ETH/cDAI liquidity pool, you will need 1 ETH and 250 cDAI, if the price of a single cDAI is $1. You will have a total deposit of $500. The initial deposit ratio is 1 ETH to 250 cDAI. On depositing the pair, you get liquidity token from Uniswap called “UNI-V1” which stands for your deposit ratio.
It might be surprising why liquidity will come from anyone. Every trade (swap trade) of ERC 20 tokens by users trigger a 0.3% flat fee. A proportion of this share also goes to liquidity providers as well based on the amount of liquidity they provide. Rather than being shared among participants, the transaction fee is usually for the exchange in a centralized exchange such as Coinbase.
Also, depositing your initial pair to the liquidity pool could warrant a change in the initial deposit ratio based on the trading activity. Still using the illustration above, when other participants’ trade regularly using the ETH/cDAI pool, it can either increase or decrease the ETH or cDAI in the pool. This will change the original deposit ratio of 1:1. Still, with the illustration above, leaving your initial deposit on the platform for a while, you might have a 1.2 ETH to 200 cDAI. The ration will keep changing.
This could take place in two ways:
First Case: Adding Liquidity Not a taxable event
Your property is not going away; instead, you are depositing tokens. UNI-V1 is simply an indication of your initial deposit ratio. This makes more sense to taxpayers and is pretty practical
Second Case: Adding Liquidity as a Taxable Event
We can also argue that you are selling your initial deposit and getting a new property – UNI-V1. Crypto to crypto trades is taxable. While this is not very practical, it can be assumed that you let go of it when you added liquidity. Although, you might not get back the original initial deposit ratio
Earning Fees
All swappers get a 0.3% transfer fee, which is distributed to all liquidity providers. The rate is based on the specific liquidity they offer. If staking rules are applied, the payments will either be taxed as rental income or interest income.
Trading On Uniswap
All crypto to crypto exchanges is subjected to tax. You can either calculate your gain or loss by subtracting the cost basis of the exchanged property from the fair market value (FMV) of the property you got.
Changes In Liquidity Ratio
Whenever there is a change in your original deposit ratio, you might have either accessed or been deprived of access to a side of your pair. This can be interpreted as giving out a portion of your pair in exchange for the other side.
As a result, every change in the ration triggers a taxable event. Tracking this, however, will be pretty hard as the ratio changes often. A good alternative is to remove your deposit and tax.
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