Last Updated: November 07, 2020
PayPal has just announced that it is rolling out a cryptocurrency hub allowing US users to buy, hold, and sell cryptocurrencies like bitcoin, ether, bitcoin cash, and litecoin. Beginning in early 2021, users will also be able to make purchases from 26 million merchants using their cryptocurrency holdings in PayPal account. This is big news for cryptocurrency adoption. But the thorny rules around cryptocurrency taxes will add some complications.
How Crypto Taxes Work?
Cryptocurrencies like bitcoin are treated as property per IRS rules. This means every time you sell, exchange, or dispose of cryptocurrency to buy something, there’s a taxable transactions.
According to the PayPal press release, users “will be able to instantly convert their selected cryptocurrency balance to fiat currency, with certainty of value and no incremental fees.” This means every time users buy a good or service from a merchant, PayPal will automatically convert the cryptocurrency to fiat, thereby triggering a taxable obligation for the consumer.
The good news is that merchants will be able to accept a new payment method without having to worry about any extra taxes or complexities of cryptocurrency accounting because PayPal will automatically be making the cryptocurrency on behalf of the user and paying the merchant in fiat currency (e.g. USD).
Example: Using bitcoin to buy a car on PayPal
Kathy wants to buy a $10,000 car from a PayPal merchant. Kathy uses one bitcoin (BTC) she holds in her PayPal wallet to complete the payment. Kathy purchased this BTC for $4,000 a few years ago and now it’s worth $10,000. When Kathy initiates the payment, PayPal converts this one BTC into $10,000 USD and transfers the funds to the merchant. At the time of the conversion, Kathy faces a taxable event and is liable for paying long-term capital gains tax on $6,000 ($10,000 - $4,000). The taxes would roughly equate to $900 ($6,000 * 15%).
“It is your responsibility to determine what taxes, if any, apply to transactions you make using your Cryptocurrencies Hub. You can access your transaction history and account statements through your PayPal account for purposes of determining any required tax filings or payments.”
Crypto Tax Forms
These transaction history statements will be essential for computing your taxes. Unfortunately, the statements alone will be insufficient to calculate your crypto taxes alone. Therefore, users need to keep detailed records of how much they paid for the coins (cost basis), market value at the time they spent them, and how long they kept them before disposing to correctly calculate the tax obligations. PayPal will most likely issue Form 1099-Ks to users and the IRS if account holders’ gross proceeds exceed more than $20,000 and have more than 200 transactions in a calendar year.
Per IRS guidance, in order to complete your crypto taxes, users will need to complete IRS Form 8949, showing detailed records of the cost basis, proceeds, date of acquisition, date of sale, and capital gain or loss for every single cryptocurrency disposal (e.g. purchase, sale, trade, etc.). Luckily, CoinTracker makes this process seamless.
It’s also notable that according to PayPal’s terms, at least at launch, they will not allow cryptocurrency withdrawals from your PayPal wallet to any other wallet. If a user wants to close the PayPal crypto account, they will have to inevitably sell the cryptocurrency in the account and thereby create a taxable event as well.
If you have any questions or comments about crypto taxes let us know on Twitter @CoinTracker.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.