Uniswap is a peer-to-peer, decentralized cryptocurrency exchange which allows you to trade ERC 20 tokens. Uniswap exchange is different from a traditional exchange like Coinbase where your transactions are processed through an intermediary.
The tax code has not addressed how taxes work for Uniswap transactions. However, there is enough guidance in place to infer some of the tax consequences of transacting in this unique DeFi exchange. In this two part series, you will get a high level overview of how Uniswap exchange works and tax implications of various transactions.What is Uniswap?
Understanding technicalities and underlying economics behind the Uniswap platform is beyond the discussion of this post. If you are curious about how it actually works, I highly recommend reading this guide published on the website. This introduction is sufficient for you to get a basic understanding of the platform so you can apply tax rules to various transactions.
If you are new to crypto, Uniswap will be a somewhat difficult concept to grasp. The easiest way to get a good understanding of Uniswap platform is by looking into three elements (liquidity, trading activity & fees) every crypto exchange needs and how Uniswap is handling them differently.
First, Uniswap relies on users’ funds to create liquidity. This is done by allowing users to participate in liquidity pools. The way these work are somewhat unique. Basically, if you want to participate in a liquidity pool, you have to deposit ether and an equivalent amount of another ERC 20 token at the same time. For example, assuming the price of 1 ETH is $200, if you want to participate in the ETH/cDAI liquidity pool, you would deposit 1 ETH and 200 cDAI, assuming price of 1 cDAI is $1. Yo...