A crypto exchange is an online platform where users can trade their digital assets. As cryptocurrency mining has been poorly profitable lately, the best way to profit from the popularity of cryptocurrencies has become mediation, so many companies have embarked on the launch of their exchange.
What is PancakeSwap?
PancakeSwap is one of the most popular DApps of all time. Moreover, it has become by far the dominant DEX on Binance Smart Chain. PancakeSwap has the most users of any decentralized platform, ever. And those users are now entrusting the platform with over $14 billion in funds.
As a decentralized exchange, all trades on PancakeSwap are automatically executed via smart contracts — completely eliminating counterparty risks. CAKE, a native utility token of PancakeSwap, is used for a variety of purposes within the growing landscape. Its main functions are yield farming, staking, participating in the PancakeSwap Lottery, and making and voting on governance proposals through the platform’s community governance portal.
PancakeSwap leverages a number of its unique properties to provide an excellent trading experience to end-users. For one, it benefits from extremely low transaction fees and rapid confirmation times — ensuring trades are executed quickly and safer use than some other AMMs on blockchains with a slower block time.
How do people make a profit on PancakeSwap?
There are multiple ways to make money on PancakeSwap. Similar to an Initial DEX Offering (IDO), PancakeSwap allows users to purchase the tokens of new early-stage projects before they have their public launch. However, in this case, users exchange their CAKE-BNB liquidity provider (LP) tokens for new project tokens during an Initial Farm Offering (IFO). As part of the process, half of the total funds (the CAKE side of the equation) is burned — adding another deflationary mechanic for the token.
You can also earn $Cake by becoming a liquidity provider on Pancake Swap and staking your LP tokens on farms. By participating in yield farm, users earn a CAKE yield on their LP tokens. To become a liquidity provider, you will have to create an LP Token using the Liquidity page. All you have to do is to add equal amounts (value) of two cryptos, like for example $100 worth of $Cake and $100 worth of $BNB and once you have created an LP Token, you will then have to stake them on the corresponding farm.
It also offers a lottery feature — allowing users to buy lottery tickets to potentially take down a large pot of CAKE. The price for a single ticket is around $5 in CAKE at current rates, but users can receive up to a 4.95% discount by purchasing 100 tickets at once. A total of 40% of the prize pool is allocated to users who match all six numbers on their lottery ticket, with the prize shared equally among winners. Millions of dollars regularly go up for grabs on the PancakeSwap Lottery.
PancakeSwap added a new feature known as NFT Profiles, which allows users to choose an NFT profile picture after purchasing one of the available Bunny NFTs. Users with a complete profile will also be able to join a team that will be allowed to participate in special team events to earn rewards. You can win collectible NFTs for participating in trading competitions and more fun & games. The rewards don’t end here. You can earn even more by staking your CAKE in SYRUP pools. Or win BNB if you can predict whether the BNB price will rise or fall. New rounds every 5 minutes!
Do you pay taxes cashing out from PancakeSwap?
The most frequent question is about taxes. We already spoke about tax regulation in our previous webinars, but in short — yes you do! Token swaps are crypto-to-crypto trades, which are taxable events in the US. Each time you convert one token for another on PancakeSwap, you’re incurring a taxable event, subject to capital gains taxes.
Each token swap, essentially a crypto-to-crypto trade, must be reported to the IRS, and you have to determine the gain or loss for each trade. Liquidity pools, Yield farming are also taxable.
Cryptocurrencies are taxed in the same way as any other assets you own, like stocks or gold. If you are buying virtual currency with US dollars and keeping it inside the exchange office where you made the purchase or transfer it to your personal wallet does not mean that you will owe taxes at the end of the year. In 2019, the IRS began including a question on its Form 1040 to determine whether the taxpayer had any cryptocurrency transactions during the given tax year.
But if you are selling your crypto for U.S. dollars, exchanging one cryptocurrency for another, or paying for goods and services with crypto — a taxable transaction happens. Because the IRS considers virtual currencies property, their taxable value is based on capital gains or losses how much value your holdings gained or lost in a given period.
When you buy and sell cryptocurrency, comparing your net proceeds to your cost basis isn’t the only step in figuring how much you owe in crypto taxes. You also need to consider the length of time you held the asset, as this determines the type of capital gain or loss you recognize. Depending on how long you hold your cryptocurrency, your gains or losses will be considered short-term or long-term. That distinction will play a big role in how much you have to pay in crypto taxes.
Swapping one cryptocurrency for another generally triggers a capital gain event. And if you are into yield farming, the reward is often classified as income tax depending on your jurisdiction.
How to cash out from PancakeSwap without paying taxes?
If you’ve donated your crypto coins, like Bitcoin or Ethereum, to eligible charities, then you may qualify for the reduced tax liability. Also, crypto gifts below $15,000 are not subject to gift taxes. When you donate an asset, you can claim the appreciated fair market value at the time of donation as a deduction against your taxable income. For example, if you own $50,000 worth of Bitcoin and choose to donate it to a charity you regularly support, you may be able to write this off as a charitable deduction on your return.
The CRT (Charitable Remainder Trust) is a specialized trust recognized by the IRS. When you create a CRT, you will designate two recipients: a charity and a lifetime beneficiary. The lifetime beneficiary is you while the charity can be a church, your own foundation, or any organization that must be recognized by the IRS as a 501(c)(3) organization.
After you create a CRT, your next step is to create a cryptocurrency wallet that is tied to your CRT. You can donate any amount of crypto which you don’t want to be taxed on within this CRT Wallet. This deduction will typically be 30–35% of the amount you donated. This is because the charity doesn’t get the money until the CRT pays out. Since this can take 20 years or until your death the IRS sees no reason to give a 100% tax deduction immediately.
The next step is to sell your crypto. When you sell the crypto from your CRT Wallet, you will receive fiat currency (USD) in return. This money will transfer into your CRT. Charities are exempt from taxes, so when they sell the low-cost basis investment, in this case, bitcoin, they don’t have to pay capital gains taxes.
But this is not the end of the strategy. You need to set up your annuity as well. An annuity is a contract that provides a fixed income stream for a person’s lifetime or a specified period. That money is entitled to a single person, who is called the annuitant. You will be entitled to an 8% payout every single year, for the rest of your life.
This strategy is allowed by the IRS and has been for many years. There are so many reasons why the parties involved benefit, and why the IRS effectively loses. The reason the government allows it is because of its beneficial impact on charities and thus society as a whole.