DEX liquidity provision: LP tokens and impermanent loss

Depositing into a liquidity pool

Liquidity provision consists of depositing two assets into a smart contract in exchange for LP tokens that represent the proportional share in the pool. On withdrawing the liquidity, the provider recovers the assets in the proportion corresponding to the relative price of each at that moment. The tax question is whether the deposit of the assets and the receipt of the LP tokens are a barter —assets given up in exchange for LP tokens, with a gain or loss at the moment— or a deposit operation with no tax effect until withdrawal.

The analysis: what the doctrine resolves and what it leaves open

The DGT has ruled in part. V0648-24, of 11 April 2024, classifies the income obtained from participation in liquidity pools and yield-optimisation platforms as investment income from the transfer of own capital to third parties (Art. 25.2 LIRPF). As investment income from the transfer of own capital, this income is included in the savings tax base (state scale of 19%–30%, the top bracket raised to 30% as from 1 January 2025 by Law 7/2024), and is valued at its market value in euros on the day it is received where it is paid in crypto-assets. What it does not expressly resolve is whether the initial swap of the assets for LP tokens is itself a barter with immediate tax effect.

On that initial swap, two positions are possible. The strict one holds that the LP tokens are assets distinct from those deposited, so that the exchange is a barter with immediate tax effect, like any other swap between crypto-assets. The flexible one holds that the LP tokens have no independent value, but are mere certificates of participation in the pool —close to units in a fund, a purely economic analogy: LP tokens are not collective investment undertakings and do not enjoy the rollover regime of Art. 94 LIRPF—, so that the taxable event is deferred until withdrawal. In our view, the more conservative position remains to treat the initial swap as a barter where distinct assets are given up and differentiated LP tokens are received, although we acknowledge that there are solid arguments for defending the simple-deposit logic in certain designs. The uncertainty is no longer total, but it remains high.

The practical cost of the conservative thesis is worth noting: treating the initial swap as a barter brings forward the taxation of a capital gain when no actual liquidity has been realised, with the cash-flow strain that this entails. And, whichever thesis is adopted on the swap, the reporting obligations remain: in particular, Form 721 where the crypto-assets are held abroad.

Impermanent loss

Impermanent loss is the difference between the value the asset would have if it had been held without depositing it and the value recovered on withdrawing the liquidity, due to the automatic rebalancing of the pool. If the barter thesis is adopted, the result of the swap and of the withdrawal is a capital gain or loss (Arts. 33 and 34 LIRPF) —as the difference between the value on withdrawal and the value on deposit, adjusted for the fees received—, likewise included in the savings tax base (Art. 49 LIRPF) but under the capital gains and losses rule, distinct from that of the pool income, which is investment income. Once that calculation is accepted, the impermanent loss is automatically captured in it. It does not exist, in itself, as a separate tax category in Spanish law.