An LP token is a token a DeFi protocol issues to record your share of a liquidity pool. It works as a receipt and a claim: hold it and you can withdraw your portion of the pool, along with the fees that portion has earned. Not every protocol uses one. Some track positions with an NFT, and others record the position internally with no token at all.
When you deposit into a pool, the protocol mints LP tokens to your wallet, and burns them when you withdraw. The number you hold stays fixed while the value behind each one moves with the pool. Trading fees accumulate inside the pool, so the same LP token balance redeems for more of the underlying assets over time.
LP tokens are usually transferable, which is where they stop behaving like a simple receipt. They can be sold, sent to another wallet, staked in a rewards contract or posted as collateral for a loan. Each of those is a separate transaction with its own tax consequences.
Uniswap v3 and protocols built like it issue an NFT instead, because a concentrated liquidity position carries a specific price range and cannot be pooled with anyone else's.
Possibly. The IRS has not addressed LP tokens, so there is no ruling to point to either way.
The question turns on whether handing over your assets for an LP token is an exchange of one property for another under section 1001. Where the token represents something that differs in kind or extent from the assets you gave up, the deposit can be a taxable disposal of those assets, with the LP token taking a cost basis equal to their value at that moment.
The competing view treats the LP token as evidence of continued ownership rather than a new asset received in trade, which would defer any gain until you exit the position. Both are argued in practice. Neither has been confirmed by the IRS.
Two points are firmer. Selling, swapping or otherwise disposing of an LP token is a taxable event. Staking one for extra rewards produces income separate from the pool itself.
LP tokens frequently arrive in a wallet with no market price attached, so tax software gives them a value of zero. The position then shows a nil cost basis, and the full withdrawal value gets reported as gain when you exit. The same failure happens in reverse where the LP token is priced but never linked back to the deposit, leaving two unconnected transactions and a broken basis chain running through the whole position.
Read our 2026 Guide to DeFi Taxes
CountDeFi specializes in complex DeFi tax accounting, including LP tokens, concentrated liquidity positions and multi-chain activity. See pricing.
