Are you a crypto enthusiast who has recently dabbled in PancakeSwap? With low fees, high liquidity, many features, and a user-friendly interface, the DEX has attracted a massive following in the DeFi space. As of April 2023, the Total Value Locked (TVL) on PancakeSwap is over $2.1 billion, according to Defillama. But financial success also entails tax obligations. In this regularly-updated expert guide, we’ll explain everything you need to know about taxes related to Pancakeswap trading, so you can stay compliant and maximize your profits.
What is PancakeSwap?
PancakeSwap is a decentralized exchange (DEX) built on the Binance Smart Chain (BSC). It allows users to trade cryptocurrencies without the involvement of a central authority or an intermediary. Pancakeswap also offers staking, on-chain games, yield farming and other DeFi activities that allow users to earn additional tokens by locking up their assets.
CAKE is the native currency of PancakeSwap, a decentralized exchange for trading cryptocurrencies. It has a capped supply of 750 million and is deflationary through “token burning”. Users can buy, win, or farm CAKE tokens and use them for trading, swapping, and collecting liquidity fees. Staking CAKE tokens can earn rewards and allow voting on governance decisions.
Do You Pay Taxes on Pancakeswap?
Yes, you likely have to pay taxes on your Pancakeswap transactions. Anytime you trade cryptocurrencies, provide liquidity, stake, or participate in yield farming on the Pancakeswap dApp, you may incur a taxable event.
What Can You Do on Pancakeswap?
On Pancakeswap, you can swap cryptocurrencies, provide liquidity to the platform, stake your tokens for rewards, perpetual trading, bridge funds, play on-chain games (like prediction), do yield farming, lottery, trade NFTs, and participate in Initial Farm Offerings (IFO). Each of these activities has different tax implications that we explain in detail in the sections below.
Pancakeswap Staking and Yield Farming
Staking involves locking up your crypto assets, such as BNB or CAKE, in a Pancakeswap staking pool. By doing so, you help secure the network and earn a share of the transaction fees generated by the platform. Staking rewards can be earned in CAKE, the native cryptocurrency of Pancakeswap, or other tokens, depending on the specific staking pool.
Yield Farming, on the other hand, involves providing liquidity to a liquidity pool on PancakeSwap by depositing token pairs. For example, you could deposit BNB and BUSD to create a BNB/BUSD liquidity pool. That way you earn a portion of the trading fees generated by the platform for this pair. Additionally, you can earn additional rewards in the form of CAKE by staking your liquidity pool tokens.
How is Yield Farming and Staking on PancakeSwap Taxed?
The IRS hasn’t made an official statement regarding the taxation of staking and yield farming income. However, given that it works similarly to mining income, it makes sense to tax staking and yield farming income under the same guidelines. The conservative approach is to tax staked coins as ordinary income based on their fair market value at the time of receipt.
Yield farming and Staking rewards on PancakeSwap are considered income and thus become subject to income tax. If you receive crypto as compensation it will be taxable at its fair market value (FMV) at the time of receipt. It’s important to keep track of the value of the rewards at the time they are received and report them accurately on your tax return.
PancakeSwap NFTs
PancakeSwap also offers NFTs (non-fungible tokens), which are unique digital assets that represent ownership of a specific item or piece of content. If you buy or sell NFTs on PancakeSwap, you may incur capital gains or losses that need to be reported on your tax return.
Do You Pay Taxes on PancakeSwap NFTs?
Yes, NFTs are currently subject to both ordinary income tax and capital gains tax (CGT). The Internal Revenue Service (IRS) Notice 2014-21 and FAQs define NFTs as virtual currencies. NFTs are clearly mentioned in the new Form 1040 instructions as falling under the definition of a “digital asset,” which means they are also taxed as property subject to capital gains tax. Although it’s possible that the IRS will eventually classify NFTs as collectibles, NFT holders should be aware of any new guidance and seek advice from a tax expert as needed
If you buy or sell NFTs on PancakeSwap, you may incur capital gains or losses that need to be reported on your tax return. As trading NFTs represent a crypto-to-crypto trade any gains are subject to taxation. You should be aware that NFTs are now taxed on income and capital gains if you own or invest in NFTs. NFTs are taxed like property, and Form 8949 is used to report gains or losses from the disposition of NFTs.
PancakeSwap Perpetual
PancakeSwap Perpetuals is a feature that allows traders to engage in leveraged crypto asset trading. Traders can buy or sell an underlying asset at a fixed price, without an expiration date.
PancakeSwap offers 100x leverage, which means that traders can amplify their gains or losses by up to 100 times. For example, if a trader buys a perpetual contract for $1,000 with 100x leverage, they will control $100,000 worth of the underlying asset. However, leverage trading also comes with risks. If the market moves against you, you can lose your entire investment.
The IRS hasn’t issued any guidance regarding taxation on perpetual transactions on DeFi. However, it’s likely that any profits from trading are subject to capital gains.
Please consult with your tax advisor to ensure that you understand the tax implications of trading crypto perpetuals on DeFI platforms since the tax regulations regarding this type of transaction can be complex and may vary based on your individual case.
PancakeSwap Bridge
The Bridge on PancakeSwap is a feature that enables users to quickly and efficiently transfer tokens between different blockchain networks. It requires depositing tokens on one network, converting them into wrapped tokens that can be transferred to the destination chain, and then converting them back to the original asset.
The IRS has not issued any detailed guidance regarding bridge taxation. Taking a conservative approach, note that certain chains require wrapping tokens to go on-chain. Under such circumstances, it’s best to consider using bridges as a taxable event. On the other hand, a more aggressive approach would classify crypto bridges as non-taxable since you’re still holding the same assets in terms of pricing (even though the smart contract is different).
Pancakeswap IFOs
Pancakeswap also offers Initial Farm Offerings (IFOs), where new projects can raise funds by selling their tokens in exchange for liquidity on the platform. PancakeSwap IFOs allow users to buy new tokens using CAKE tokens. Users lock up CAKE tokens to earn the new token at a fixed price, which is distributed once the IFO ends.
If you participate in an IFO and later sell the tokens at a profit, you may incur capital gains tax and need to report this on your annual tax return.
You may only be liable for Capital Gains Tax on the profits made from selling, swapping, spending, or gifting your coins or tokens acquired from an IFO event on PancakeSwap at a later time.
Do You Pay Tax on Adding and Removing Liquidity on PancakeSwap?
The IRS hasn’t issued detailed guidance regarding liquidity pool taxation. However, there’re two approaches to tackle taxation in this case:
The conservative approach states that exchanging tokens for liquidity pool tokens (LP tokens) constitutes a trade of one digital asset for another, triggering a taxable event. Adding or removing liquidity will be subject to capital gains tax, and the difference in value between the coins you traded and the LP tokens you were given will determine whether you made a profit or a loss. The tax basis for your tokens is their original purchase price. Once you have control over your LP token investment, you will be taxed on any rewards you receive, just like with other sources of income like staking. Moreover, whether you add or remove LP tokens for the underlying assets, you may incur capital gains or losses that need to be reported on your tax return.
On the other hand, some may argue that these transactions are similar to making a deposit, where you expect to receive your original coins back and the LP tokens only represent a receipt of your deposited assets. However, the presence of impermanent losses in liquidity pools means you do not have control over your original coins. Therefore, it’s safer to argue that such transactions are taxable.
How are Swaps on PancakeSwap Taxed?
Token swap transactions executed on PancakeSwap may be subject to capital gains tax. Whenever you dispose of your cryptocurrency by selling, trading, or using it, you may trigger a taxable gain or loss that’s categorized as capital gains tax. This is the tax levied on the gains arising from the sale of assets.
Based on the above, you may be required to disclose any gains or losses from your cryptocurrency trades in Form 8949 “Sales and Other Dispositions of Capital Assets”.
How to Keep Track of PancakeSwap Trades for Taxes?
Unfortunately keeping track of all your trades and transactions on PancakeSwap can be challenging. Most DeFi protocols don’t offer tax forms to their users, making it harder to fully determine your cost basis across protocols and complex transactions.
Using crypto tax software can help you stay compliant with tax laws by offering easy integration with multiple exchanges, wallets, and DeFi protocols while offering accurate calculation of cost basis and capital gains/losses on your transactions.
Does PancakeSwap Report to the IRS?
No, PancakeSwap does not report to the IRS. As a decentralized exchange built on the Binance Smart Chain (BSC), it doesn’t have the obligation to fully disclose user data to the IRS. It’s up to individual users to accurately report their transactions and pay any taxes owed.
IRS Guidance on Crypto Taxes
The IRS has issued guidance on how cryptocurrency transactions should be treated for tax purposes. In general, cryptocurrency is treated as property for tax purposes, which means that capital gains rules apply when buying or selling cryptocurrencies. It’s important to keep track of your cost basis so you can accurately calculate your capital gains or losses when you sell. The cost basis is the original amount you paid for the cryptocurrency.
At the moment, NFTs are taxed on both capital gains and ordinary income (any earnings or rewards from holding the NFT). If you have any questions regarding NFT taxation in the US, check out this guide!
How Can Accointing Help With PancakeSwap Taxes?
Using reliable crypto tax software can help you considerably in working out your PancakeSwap taxes. Accointing’s tax calculator offers easy integration with multiple exchanges and wallets, accurate calculation of cost basis and capital gains/losses, and additional tax tools to optimize your crypto taxes.
With the crypto tax calculator, you can easily keep track of your transactions on PancakeSwap and other platforms, and generate a tax report that can be used to file your taxes accurately.
In conclusion, trading or providing liquidity on a DEX such as PancakeSwap triggers a taxable event that needs to be reported to the IRS. It’s important to keep track of your transactions and use a comprehensive crypto tax calculator like Accointing to help you stay compliant with tax laws. By understanding the tax implications of using PancakeSwap, you can make informed decisions and optimize your taxes.
The information contained in this guide, including any supplemental materials, is for general information purposes and does not constitute financial, investment, legal, or tax advice. The present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.
