ReKt on impermanent loss AND taxes

v2 USDC-WETH pool:

  • rekt on “impermanent loss”
  • if I withdraw liquidity, from a tax perspective, I’m swapping LP token for ETH and USDC tokens for short term cap gains: 50% tax rate. ReKt

My options:

  • Say in v2 pool and keep getting rekt on IL
  • Withdraw from v2 pool to USDC and ETH: rekt on taxes
  • Change to v3 pool: rekt on taxes (it’s still a trade from tax perspective!!!1)

Any ideas?

rekt on “impermanent loss”

You don’t loose money with IL, it’s money that you could have won but you havn’t.
Pratically, let’s compare multiple strategy starting with 1k$ in the USDC / ETH pair and then price of ETH doubles :

  • If you would have hodled 1k USDC instead you would have 1k$
  • If you would have pooled thoses tokens into the pair, you would have 1k5$
  • And if you would have hodled ETH you would have 2k$

What is important to realise is that this is too late. You will never win the 500$ you are missing right now. To have that money you would have needed to hodl ETH (which you havn’t).

If your IL goes back down, you might think this would be a good thing, while it wouldn’t, if IL goes back down this means that you will become poorer (simply ETH returning to the previous price), so you would have 1k$ back again, it’s just that someone that hodled ETH would have 1k$ too. (I’m ignoring the case where USDC value raises, for me only ETH can fall to reduce the IL)

IL isn’t an objective mesure nor usefull metrics and I don’t think you should base your strategy on this.

Agree that IL is better understood as an opportunity cost.

Still feels ReKt, though.

And you didn’t even address the other thing.

This perspective really misses something.

Consider the question: Was the decision to deposit into the USDC-WETH pool a good decision? Obviously, it wasn’t. Considered as an isolated, single decision, deciding to deposit was not a good decision. This matters because every prospective LP has to make this decision.