Liquidity mining: taxation of DeFi liquidity rewards

When you provide liquidity in a DeFi protocol like Uniswap, Curve, or Balancer, you obtain two types of returns: fees from traders using the pool and (sometimes) additional incentive tokens. How does the AEAT treat each of these incomes?

Step 1: Liquidity pool contribution

When you deposit, for example, ETH and USDC into a Uniswap v2 pool:

• You receive LP tokens (Liquidity Provider tokens) representing your share.
• The key tax question: is this a transfer of ETH and USDC?

Majority view: The contribution to the pool does not trigger a taxable event because it is comparable to a deposit, not a sale. LP tokens are proof of position, not a new asset acquired for a price.

However, some advisors argue that there is a crypto-to-crypto exchange (ETH+USDC for LP token), which would trigger a taxable event.

Step 2: Trading fees

Uniswap v3 LPs accumulate fees in the token pool. Upon withdrawal (or claiming if the protocol allows), the fees received are:

Investment income (Rendimientos del capital mobiliario), at the market value at the time of accreditation.

Step 3: Reward tokens (liquidity mining incentives)

When the protocol distributes governance tokens (UNI, CRV, BAL…) as an additional incentive:

Capital gain (Ganancia patrimonial) or investment income (rendimiento del capital mobiliario) depending on the protocol and the incentive structure, at the market value at the time of the claim.

Step 4: Withdrawal from the pool (impermanent loss)

When withdrawing liquidity, the pool returns assets proportional to your share, but in a different composition than what you contributed (due to the AMM's automatic rebalancing).

Impermanent loss (IL): The difference between the value of what you deposited and the value of what you withdraw. If when you deposited you had 1 ETH + 2,000 USDC (value: €4,000) and when you withdraw the pool gives you 0.8 ETH + 2,400 USDC (value: €3,600), you have suffered an IL of €400.

Is IL deductible? It is a deductible capital loss, calculated as the difference between the cost of the contributed assets and the value of the withdrawn assets.

Uniswap v3 and concentrated positions

In Uniswap v3, positions are NFTs (ERC-721). Concentrated positions face the same issues as the standard pool, but each position is a different asset. Managing multiple v3 positions is fiscally more complex.

Tax summary of the complete cycle

Conclusion

Liquidity mining is fiscally complex and each protocol has its peculiarities. Documenting every deposit, every claim, and every withdrawal with dates and prices in EUR is essential for a correct tax return.