I live in UK, but wouldn't mind to get responses related to any jurisdiction.
better explain with an example:
- I buy 180Tokens at $0.10 price.
- 1 year later I still have those 180Tokens.
- I freeze 100Tokens in a blockchain algorithmic and non-custodial liquidity protocol.
- This will give me 100pTokens that allow me to borrow up to 40Tokens in the Liquidity pool (pair pToken;Token).
- I borrow 10Tokens at 10% interest (yes silly because I had 180 of them from the start, but wait)..
- I sell those 10Tokens at $1 price for $10. (no CGT here as I am not selling my own tokens but I am selling a loan and shouldn't be taxed)
- Now I have to return to the liquidity protocol 11Tokens (by end of this year or 12.1 by end of next year).
- First of all: is there any of the points so far that triggered a taxable event?
- Second: what is the best way for me to return those 11Tokens but avoiding a CGT taxable event?
- A1. Get liquidated.
- B1. Burn 11pToken to get ~11Tokens and use those for the repayment.
- C1. Use 11Tokens from the unused 80Tokens remaining in the personal wallet to repay the 11Tokens
- At this point here are the possible scenarios:
- A2. You can burn the 85pTokens remaining after liquidation (11pTokens plus some 4pTokens fees?) and get back 85Tokens. Final Balance: 165Tokens, $10, No Tax?
- B2. You can burn the 89pTokens remaining and get back 89Tokens. Final Balance: 169Tokens, $10, No Tax?
- C2. You can burn the 100pTokens remaining and get back 100Tokens. Final Balance: 169Tokens, $10, No Tax?
I would myself rule out the liquidation scenario being tax free as said in this message I was inspired from.
