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I live in UK, but wouldn't mind to get responses related to any jurisdiction.

better explain with an example:

  1. I buy 180Tokens at $0.10 price.
  2. 1 year later I still have those 180Tokens.
  3. I freeze 100Tokens in a blockchain algorithmic and non-custodial liquidity protocol.
  4. This will give me 100pTokens that allow me to borrow up to 40Tokens in the Liquidity pool (pair pToken;Token).
  5. I borrow 10Tokens at 10% interest (yes silly because I had 180 of them from the start, but wait)..
  6. 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)
  7. 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
  1. 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.

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    Setting aside all the crypto jargon, this looks to me like a short sale: you borrowed an asset and sold it. Your country's tax law will certainly have rules for how to pay taxes on gains from short sales. Nov 17 '21 at 15:48
  • What country's tax laws do you want to know about? Please add an appropriate jurisdiction tag. Nov 17 '21 at 15:48
  • Actually, shorting an asset when you already own more of it is usually just treated like an ordinary sale; I believe "constructive sale" is the term in US tax law. Nov 17 '21 at 15:49
  • I live in UK, but wouldn't mind to hear how things change in different jurisdictions. Anyway when I lend my Tokens for qTokens, is that a taxable event? liqwid-labs.gitbook.io/liqwid-docs/faq Nov 17 '21 at 15:54

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