DeFi Liquidity Pool Tax UK: Uniswap V2 and V3 Explained

HMRC published its DeFi manual pages CRYPTO22600 onwards in 2022, and the guidance is deliberately open-ended: whether depositing into an AMM liquidity pool is a taxable disposal depends on the "rights and obligations" you retain over the deposited tokens. Two years of practice have settled a working consensus. Here is what a UK Uniswap LP needs to file.

The core test: CRYPTO22600

HMRC's rule is that when you transfer beneficial ownership of a crypto-asset to a DeFi protocol, that transfer may or may not be a disposal depending on the terms. The key factors are:

- Do you get back the same tokens you deposited, or is what you receive economically different? - Does the protocol have the right to use your tokens as it pleases, or must it hold them for you? - Is your receipt token a "wrapper" for your position (no disposal) or a new asset with different economic exposure (disposal)?

For Uniswap V2 and V3, the answer differs by version.

Uniswap V2: the constant-product pool

When you deposit two tokens into a V2 pool (say ETH and USDC), you receive an LP token that entitles you to a share of the pool. The pool automatically rebalances between the two tokens as trades happen; you can withdraw a mix of the two whenever you want.

**Two readings, both defensible:**

- **No-disposal reading (conservative):** the LP token is a wrapper for your position; you still have beneficial ownership of your share of the pool; entering and exiting are not disposals. Fee income accrues to the pool and is realised only on exit. This maps to CRYPTO22600's "no rights transferred" prong. - **Disposal reading (aggressive):** the deposited tokens are converted into a materially different asset (the LP token, which represents a mixed and rebalancing exposure). Entry is a disposal of ETH and USDC at market value; the LP token acquires at that combined value. Exit is the reverse.

The disposal reading is more prudent when the pool is highly volatile or the LP token trades on secondary markets. The no-disposal reading is more common in practice and matches HMRC's stated concern about preserving beneficial ownership.

CryptoLens defaults to no-disposal on V2 LP entries; the treatment can be flipped per-account in <a href="/tax">/tax</a> settings.

Uniswap V3: concentrated liquidity

V3 replaces the fungible LP token with a non-fungible position NFT that encodes your price range and share. Two consequences:

- **Fees accrue but are not automatically compounded.** They sit alongside your position and are realised on the "collect" call, or automatically on burn. - **Rebalancing between price ranges is a new position.** Closing an out-of-range position and opening a new one at a different range is arguably a disposal of the old NFT and acquisition of a new one — this is stronger for V3 than for V2 because the NFT is measurably different.

The prudent V3 treatment most UK accountants apply:

- Entry: disposal reading is more common for V3 because the NFT is distinguishable from the underlying tokens. Or, apply no-disposal if you insist and can justify it. - Fee collection: miscellaneous income at receipt, at GBP value on the collect date, per CRYPTO21200. - Range adjustments: treat as burn + mint, so a disposal and a new acquisition. - Exit: dispose of the NFT; acquire the two withdrawn tokens at their GBP values on exit.

Impermanent loss — is it a real loss?

Impermanent loss is the difference between the value of your LP position and what you would have had if you simply held the two tokens. It is a real economic loss but it only crystallises into an allowable CGT loss on exit (or on entry under the disposal reading).

There is no separate deduction line for "impermanent loss". Your allowable loss is the difference between total proceeds on exit and total cost basis on entry — which naturally includes the IL effect.

Wrapped tokens inside the position

Providing liquidity in wstETH/WETH involves wrapping ETH into WETH (not a disposal under CRYPTO22050) and then adding to the pool. Providing in stETH/ETH involves treating stETH as its own token — Lido's staking token is a different economic asset with slashing risk, so the initial ETH-to-stETH conversion is a disposal in the conservative reading. See <a href="/blog/liquid-staking-tax-uk">liquid staking tax UK</a>.

Fee income on V2

V2 fees are compounded into the pool automatically, so there is no discrete "receipt" event. Under the no-disposal reading, the extra proceeds you receive on exit versus what you deposited represents fee accrual plus IL plus price change, and the whole thing flows through CGT.

Under the disposal reading, the LP token's cost basis was set on entry and any exit above that is a capital gain, which captures the fee accrual as CGT rather than income. This is one of the reasons some accountants prefer the disposal reading — it keeps the tax character simple.

Filing pipeline for a Uniswap LP

1. Scan every wallet address you used with <a href="/import">/import</a>. 2. On <a href="/tax">/tax</a> settings, pick your DeFi treatment: no-disposal (default) or disposal. 3. Review the LP entries and exits in the disposal ledger. For V3 positions, check that fee collects appear as income. 4. Cross-check against <a href="/carf-check">/carf-check</a> for any missing wallets HMRC might have visibility on. 5. Export SA108 CSV plus the PDF audit trail. Keep for six years past the filing deadline.

What HMRC is likely to challenge

For 2026/27, the DeFi enquiry patterns we see are: unreported fee income on V3, unreported entries treated as pure hodl, and unreported <a href="/blog/yield-farming-tax-uk">yield farming</a> reward tokens. LP entries and exits themselves are less often challenged because both readings are defensible under CRYPTO22600 — but you need to have applied one consistently, not cherry-picked per position.