The advantages of providing liquidity over staking from a tax perpective
I want to compare staking to providing liquidity to Pancake Swap over a longer term. When you stake Cake or a single coin on Pancakeswap, you earn a yield that is continuous. Every 10 seconds you have a little more Cake. All of these events should be taxable using my understanding of US law. That means that every 10 seconds you have a taxable event where you will owe your tax rate on the few cents you just earned.
Now let's compare that to providing LP. I am referring to purchasing a Flip token using Bunny's Zap or by providing liquidity to a pool. When you provide liquidity to a pair lets say for instance, Cake and BNB, is it considered buying a new coin? Is that a taxable event? I would argue that buying an LP is selling your other two coins. If there is a gain on the two coins you are converting into an LP, I would argue that you would need to pay taxes or take a loss on that transaction.
OK, now you own an LP token. Let's say you have 10 LP tokens and you just hold them. If you don't make any further transaction and sell the LP token two years from now for a profit, I would argue that the last sale is the actual taxable event. I would think that the accumulation of fees that build up into the LP token would not need to be taxed until you sell the LP. For me Staking seems very similar to dividends and dividends are taxable.
Providing LP seems more like buying stock and even though the company makes money unless they provide a dividend or you sell, you don't have a taxable event.
Please check with a tax attorney. I am not anyone from whom you should take tax advice.