Liquidity pools manual process

Koinly recognises Liquidity in and out transactions, e.g. from uniswap, and labels them as such. “Realize gains on liquidity transactions” is off for me, but for cost basis method Shared Pool / Individuals gains still show. Until koinly resolves this, would use of a pool or manual wallet be a work-around?

e.g. soft delete the liquidity transactions
create a manual transfer into a manual wallet when a token is added to a pool
create a manual transfer out again for the same amount
repeat for both tokens in the pool (assume only 2)
finally add a manual exchange transaction to reduce one token and gain another in whatever quantities match up with what came out

For the UK, fees earnt during the time the liquidity is in the pool are probably income. However, I am not sure it is possible to separate this from loss / gain caused by the changes in ratio of tokens in the pool, which feels like capital gain, like a swapping tokens. Not sure how to deal with that but for now I wonder if the above method is good enough.

To play devils advocate here, not sure if I’m right or wrong.

So, when you provide liquidity on Uniswap or many other DeFi platforms, you actually get a token in exchange for the tokens you leave there, so, couldn’t it be considered like a trade, and hence a disposal?

Basically, if you provide ETH and DAI, and get UNI-V2, then that would crystalize gains on ETH and DAI and you would acquire UNI-V2 at the £ value those tokens had.
At the time of withdrawing the liquidity, you’d be effectively selling UNI-V2 for ETH and DAI, and there you’d realize a gain/loss as the price you sell UNI-V2 would be the £ value of the ETH and DAI you’re getting back.

What do you guys think?

Yes I think it is valid @CryptoIntl. My understanding is that there is no clear right and wrong, not yet at least until and unless tax authorities get specific. You could also argue that every time a liquidity pool is used to exchange tokens by anyone, you gain a bit of income…a tax event. Try reporting those to the tax man! So to be practical, you just have to take a view on entry and exit from the pool. I prefer to do nothing at entry and create a gain/loss on each token at the end.

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