Let them eat CAKE… or in this instance, stake it and earn some impressive rewards. Decentralized exchange PancakeSwap is the most popular DEX on the Binance Smart Chain - even beating out Binance’s own DEX - thanks to a huge variety of innovative trading options and yield farming opportunities. But with big profits come big tax implications. We’ve got everything you need to know about PancakeSwap, including what PancakeSwap is, how PancakeSwap works and PancakeSwap taxes.
What is PancakeSwap?
PancakeSwap is another decentralized exchange (DEX), following in the footsteps of other popular dexes like SushiSwap or UniSwap. Unlike those two examples though - PancakeSwap runs on the Binance Smart Chain and allows investors to trade BEP-20 tokens, as well as earn liquidity pool tokens and PancakeSwap’s native token CAKE.
DeFi investors have flocked to PancakeSwap since its launch in September 2020 thanks to high liquidity and a wide variety of investment opportunities.
How does PancakeSwap work?
PancakeSwap works similarly to any other automated market maker (AMM). So instead of relying on order books, limit/market orders and bid/ask systems, trading on the platform is enabled by automated liquidity pools - maintained by liquidity providers and executed by smart contracts.
Anytime a liquidity provider adds liquidity, they’ll receive liquidity pool tokens representing their share in a given pool(s). In return for providing liquidity, liquidity providers receive a share of the transaction fees related to the pool they’ve contributed to. On PancakeSwap, both makers and takers pay a flat 0.25% transaction fee, 0.17% of which is shared among the liquidity providers. The remaining 0.08% goes to the PancakeSwap treasury - which is used to maintain the platform, pay salaries, fund bounties and so on.
Whenever someone trades in a pool you’ve provided liquidity to, the majority of their transaction fee will go back into the liquidity pool. These fees increase the value of liquidity pool tokens, so when you redeem them by removing your liquidity - you’ll have more of your cryptocurrency than you first put in. The longer you leave your liquidity in a given pool, the more trading fees you’ll earn.
To access PancakeSwap, you’ll need a Web3 wallet. The most popular options include MetaMask, WalletConnect and Trust Wallet. Some of these wallets take a little configuration to support the Binance smart chain, but once you’ve done it, you can interact with the PancakeSwap interface using your wallet.
What can you do on PancakeSwap?
PancakeSwap offers all the features any other dex does, as well as some other special ones. You can trade BEP-20 tokens, as well as add liquidity and earn rewards.
You’ll find a huge variety of liquidity pool tokens available depending on the pool you add to. For example, if you added BUSD and BNB to the pool - you’d get a BUSD-BNB liquidity pool tokens in return. This works the same way for every pool. You’ll receive a proportional number of tokens that represent your share in the pool.
You can redeem your liquidity pool tokens to reap the trading fee rewards whenever you want to. But one of the awesome features that came from PancakeSwap V2 was the farming and staking protocols.
PancakeSwap Staking and Yield Farming
You can farm CAKE - PancakeSwap’s governance token - by staking your LP tokens in one of PancakeSwap’s farms. There are a huge amount of options for which liquidity pool tokens to stake, some offering more than 200% APR - see a full list here.
It doesn’t end there either because you can also stake the CAKE you earn in SYRUP pools. Like above, there’s a lot of SYRUP pools to pick from - each offering different tokens as a reward, like RACA, APX, FUSE and many more. You can even stake your CAKE to earn more CAKE. One of the most interesting SYRUP pools though is the IFO CAKE pool.
The IFO CAKE pool lets investors earn credits by staking cake. An IFO is an initial farm offering - in other words the new projects that launch on PancakeSwap, like SYRUP pools and more. When you stake CAKE in the IFO CAKE pool, you’ll earn IFO credits that give you the ability to get early access to earn from brand new projects.
Another fun feature is the PancakeSwap lottery. You can use CAKE to enter lotteries on the platform and a ticket costs around $5 in cake. The lottery pool is funded by a percentage of the PancakeSwap Treasury fund and will increase until someone wins the jackpot. At the time of writing, the jackpot is just over 15,000 CAKE (so around $116,000!)
Finally, PancakeSwap has an NFT marketplace where you can buy and sell NFTs - as well as a fun game where you can win NFTs from the Pancake Bunnies collection. You can win these by completing various tasks and taking part in competitions on the platform. You can then sell these prize NFTs for CAKE or keep them.
With so many different ways to trade and earn on PancakeSwap - your PancakeSwap taxes can get complicated to say the least.
To add further confusion, tax offices like the IRS haven’t yet issued specific guidance for DeFi transactions, so we need to interpret the current crypto tax rules and apply them as best we can to PancakeSwap. So let’s dive into it.
Do you pay taxes on PancakeSwap?
Yes. You’ll need to pay taxes for your PancakeSwap trades and earnings.
Crypto is subject to either Income Tax or Capital Gains Tax. The tax you’ll pay depends on the specific transaction you’re making - so let’s break them down.
Do you pay tax on trades on PancakeSwap?
Yes - depending on where you live. In most countries you'll pay Capital Gains Tax on any capital gain you make from trading one token for another. So for example, say you traded BNB for BUSD, you would pay tax on any gain you've made on your BNB - that's the difference in value from when you got the asset to when you traded it.
Do you pay tax on adding and removing liquidity on PancakeSwap?
Like we said, there's no clear guidance from the IRS or any other tax office just yet on adding and removing liquidity. However, when you add liquidity and remove liquidity from a pool on PancakeSwap you receive a liquidity pool token in return. This could be seen as a crypto to crypto trade and therefore it would be subject to Capital Gains Tax.
Do you pay tax on liquidity pool tokens on PancakeSwap?
Like the above, there’s no clear guidance on liquidity pool tokens so it all comes down to the way the specific DeFi protocol you’re using works and how you interpret the current crypto tax guidance.
You don’t earn new liquidity pool tokens on PancakeSwap - instead the value of your liquidity pool token increases whenever someone makes a trade in the pool you’ve contributed to. So you’re not earning new tokens. With this in mind, it’s very unlikely that you’d pay Income Tax on PancakeSwap liquidity pool tokens as you’re not earning new tokens.
It’s only when you remove your liquidity that you’ll have a realized gain. This means when you remove liquidity and exchange your liquidity pool tokens back for your original asset, you’re making a crypto to crypto trade which would be subject to Capital Gains Tax.
Do you pay tax on staking liquidity pool tokens on PancakeSwap?
The IRS hasn't issued clear guidance on staking rewards tax yet. However, as this is a means of earning new tokens, it's likely this could be seen as income. So, if you’ve staked your liquidity pool tokens to earn CAKE, you’ll need to pay Income Tax on the fair market value of your CAKE at the point you receive it.
Do you pay tax on staking cake in SYRUP pools?
Yes. Like above, earning rewards from staking a token (any token) is subject to Income Tax. You’ll pay Income Tax on the fair market value of your new tokens at the point you receive them.
Do you pay tax on PancakeSwap IFOs?
The IRS has no real guidance on IFOs - so we need to interpret the way this protocol works under the current crypto tax rules.
You stake cake and you earn IFO credits (based on the amount of CAKE you commit) as a reward. However, these IFO credits have no value outside of the PancakeSwap platform. They're not a token or a coin and you couldn't sell or trade them. They're more akin to a utility token - which are commonly utilized in ICOs.
Arguably, when you commit your staked CAKE to an IFO, it is at this point that there is a gained value. We could perhaps liken this to a token spent on goods or services, which could be a Capital Gains Tax event.
If you're participating in PancakeSwap IFOs, we recommend you speak to an experienced crypto accountant for bespoke advice on how to report your IFO activities to ensure you remain tax compliant.
Do you pay tax on the PancakeSwap lottery?
Again, tax offices have released very little guidance on crypto gambling and lotteries. However, they have extensive guidance on lottery winnings - and it'll all depend on where you live.
If you hit it big in the PancakeSwap jackpot and live in the US, the US charge both Federal and State Income Tax on winnings.
Meanwhile if you live in the UK, lottery winnings are tax free. Similarly, in Canada and Australia lottery winnings are tax free.
You should check the specific lottery and gambling tax rules where you live.
Do you pay tax on PancakeSwap NFTs?
NFTs are treated like any other coin or token from a tax perspective, so when you sell an NFT, you'll pay Capital Gains Tax on any capital gain made.
When it comes to buying NFTs, because you almost always purchase them with crypto - this is seen as a crypto to crypto trade and any capital gain is subject to Capital Gains Tax.
What do I need to report to my tax office?
It depends on where you live - each tax office has different reporting requirements for crypto
In the US, you need to report each taxable crypto transaction on Form 8949, including:
- A description of the asset
- The date you acquired the asset
- The date you disposed of the asset
- The sale price at fair market value
- The cost basis of the asset at fair market value
- Your capital gain or loss
You’ll also need to report your net capital gain and loss on Schedule D and any crypto income on Schedule 1 and potentially Schedule C.
It’s a lot of work. If you’re an active trader on PancakeSwap and other DeFi platforms, the list of transactions you need to report can quickly ramp up into the thousands per financial year. You’ll need good records of all your transactions on PancakeSwap with all the information - you can do this manually or with a crypto tax app. Let’s look at both.
How to do your PancakeSwap taxes
To get started with your PancakeSwap taxes - you need your complete PancakeSwap transaction history. There’s two ways you can do this.
- Use crypto tax software and connect to the Binance Smart Chain via API. You can take your BSC public address or key from the wallet you use to interact with PancakeSwap and input it straight into a crypto tax app which will automatically import your PancakeSwap transaction history to your app, identify your taxable transactions and calculate your capital gains, losses and income.
- Export your PancakeSwap transaction history in a CSV file. You can’t download a CSV file from the PancakeSwap platform directly, but you can use third party services like BSCscan to get a CSV file of your transaction history on PancakeSwap. You can then use this CSV file to identify your taxable transactions, capital gains, losses and income yourself.
Does PancakeSwap provide a tax report?
No. PancakeSwap doesn't provide any kind of tax report. But you can get a tax report by importing your PancakeSwap transaction history to a crypto tax app using API or CSV file import.
Does PancakeSwap supply a financial statement?
No. PancakeSwap doesn’t supply a financial statement.
How to generate a PancakeSwap tax form
There’s two ways you can do this depending on whether you’re using crypto tax software or not so we’ll look at both.
If you’re doing your taxes yourself, you need a complete transaction history from PancakeSwap for the financial year. You can get a CSV file of this using the method above. You’ll then need to identify each taxable transaction, the subsequent income or capital gain/loss and report this to the IRS using Form 8949 for capital gains and losses, Schedule D for net capital gains and losses and Schedule 1 for crypto income (and potentially Schedule C too for income).
Alternatively, save yourself hours and use a crypto tax app to do all this for you. All you need to do is sync your PancakeSwap transactions using API. Your crypto tax app will then identify your taxable transactions and calculate any capital gains, losses and income for you. You can then download a tax report specific to your location to hand over to your tax office - for example, you can download a pre-filled Form 8949 and Schedule D.
PancakeSwap CSV export
As we said above, PancakeSwap doesn’t offer an option within the platform to download a CSV file of your transaction history. However, you can use a service like BSCscan to generate and download a CSV file of your PancakeSwap transaction history to do your taxes manually.
PancakeSwap tax API
The easier option is to use an API to get your PancakeSwap transaction history automatically imported into a crypto tax app.
All you need to do is sync the wallets you use to interact with PancakeSwap. So for example, if you use Trust Wallet to trade on PancakeSwap - you’d use the Binance Smart Chain API to integrate your Trust Wallet. We’ve got instructions on how to get your API keys for the most popular PancakeSwap wallets including MetaMask and Trust Wallet. Once you’ve got your API keys, enter them into your chosen crypto tax app and it’ll calculate your PancakeSwap taxes for you and generate your tax report.
Does PancakeSwap report to the IRS?
Anonymity is important on PancakeSwap - we don’t even know who the founders are! In the DeFI space, anonymity is a huge part of the appeal.
PancakeSwap themselves likely haven’t seen any pressure from the IRS just yet - mostly because they seem to have no idea what DeFi is. However, it all depends on the wallet you’re using as to whether the IRS would be able to track your transactions.
Most Web3 wallets don’t require KYC, but many of them require you to link a debit or credit card. If you’ve got expenses going out of your bank account, or money coming back in - you better believe the IRS is going to want to know about it. Similarly, if you’re earning and moving assets into centralized exchanges, many of these exchanges have faced pressure from the IRS to share KYC data.
The best way to stay tax compliant is to report your crypto taxes accurately.
If you’ve been wondering is Koinly a PancakeSwap tax calculator tool, the answer is, yes! Not only can Koinly import PancakeSwap transaction history, but Koinly can also calculate your PancakeSwap taxes in a format that makes sense for your country’s tax office. As a PancakeSwap tax calculator, Koinly is able to do a bunch of impressive tasks that save you time and can even save you from paying too much taxes.
- Koinly will import all your PancakeSwap trades including purchases, sales, swaps, income and more!
- Koinly will then convert your PancakeSwap transactions into your country’s currency, at fair market value. This in itself is a massive time saver.
- Finally, Koinly works out which of your PancakeSwap trades are taxable, and which are not - calculating your PancakeSwap gains/losses, crypto income and more. All of this is really important for being able to submit an accurate PancakeSwap tax return to your tax office.
Sign up free and try our DeFi tax software today.