Liquidity pool
Also known as: LP, AMM pool, liquidity provision
A pool of tokens that powers a decentralised exchange; depositing and withdrawing can be disposals, and fees earned are income.
Definition
A liquidity pool holds pairs of tokens that traders swap against on an automated market maker (DEX). Providing liquidity earns a share of trading fees and sometimes reward tokens. Tax treatment is complex: depositing tokens for an LP position and later withdrawing can be disposals, fee and reward income is generally revenue, and impermanent loss affects the amounts you ultimately recover. Detailed records of each step are critical.
Example
You add ETH and USDC to a pool and receive LP tokens. Depositing may be a disposal; the trading fees you earn are income while you provide liquidity.
Jurisdiction notes
- South Africa: No specific SARS guidance; LP deposits/withdrawals may be disposals and fees are generally income — track each step conservatively.