De Fi Tax Problem

Evangeline, a precocious proto-entrepreneur desires to enter the Decentralized Finance (De Fi) business. Her activities are limited and passive and do not qualify as a trade or business for tax purposes. She has US$10,000.00 of personal funds to commit to this activity.

Evangeline obtains a wallet from a wallet provider (e.g. Metamask) and decides to acquire 10 ETH (value of (1 ETH) at time of acquisition US$1,000.00).

She decides to Stake 5ETH into a liquidity pool for a year and a day (at least).

.5ETH are used to acquire insurance on the investment in the liquidity pool through a smart contract.

The remaining 4.5 ETH earn a fee of .3% of the value of the ETH provided which is provided to Evangeline for becoming a liquidity provider. The 4.5 ETH plus earned fee are invested into an ERC-20 token. The ERC-20 token is swapped for Bitcoin is a bitcoin wrap wBTC. At the time of the transaction Bitcoin is Selling for US$20,000. The network fee for the swap is 0.055 of the wBTC token received.

After one year and a day, Evangeline unwinds her transaction and receives interest equal to five percent (5%) of her invested funds (net of expenses and fees). 1 ETH is selling for One Thousand Five Hundred Dollars($1,500). Bitcoin is selling for Nineteen thousand dollars ($19,000). There are no unwinding fees.

1. How much income and gain net of expenses does Evangeline receive?

With the remaining 5 ETH Evangeline invests in a convertible bridge loan for a start up company. Under the terms of the convertible bridge loan, Evangeline has the option after a two (2) year holding period to receive either (1) her 5 ETH plus 12% interest on the funds let or (2) 1000 shares of Newco. At the end of two years, 1000 Newco shares are redeemable for 10 ETH. Evangeline opts to covert to Newco Shares. Assume ETH are worth ($1,000) on investment and ($1,500) on conversion.

2. How would the conversion be reported and taxed?