Impermanent loss
Also known as: IL, divergence loss
The reduction in value a liquidity provider can suffer when pooled token prices diverge, which becomes real on withdrawal.
Definition
Impermanent loss is the shortfall a liquidity provider experiences relative to simply holding the tokens, caused by the pool rebalancing as prices move apart. It is "impermanent" because it reverses if prices return, but it becomes a real loss when you withdraw. For tax, the loss is recognised through the disposal mechanics on withdrawal — the proceeds you actually recover versus the base cost — rather than as a separate deduction.
Example
You provide ETH/USDC liquidity; ETH rises sharply, so on withdrawal you hold less ETH than if you had just held — an impermanent loss now realised.
Jurisdiction notes
- South Africa: Impermanent loss is reflected through disposal mechanics on withdrawal (proceeds vs base cost), not as a separate deduction.