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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. Commented Nov 17, 2021 at 15:48
  • What country's tax laws do you want to know about? Please add an appropriate jurisdiction tag. Commented Nov 17, 2021 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. Commented Nov 17, 2021 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 Commented Nov 17, 2021 at 15:54

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