In the coming weeks, Paypal is preparing to launch a digital wallet and a Cryptocurrency Hub allowing its customers to buy, hold and sell cryptocurrencies like bitcoin, ethereum, bitcoin cash, and litecoin. Beginning in early 2021, PayPal
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users can also use the service to buy goods and services from 26 million merchants connected with PayPal. Although this is great news for crypto adoption, the current taxation around cryptocurrencies is not helping the cause at all.
Crypto Taxes & PayPal Cryptocurreny Hub
Cryptocurrencies like bitcoin are treated as property per the IRS rules. This means every time you sell, exchange, or dispose of it to buy something else, there’s a taxable event. According to the PayPal press release published on Oct 21, 2020, 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 convert their cryptocurrency into fiat to pay for goods and services via PayPal, that user will have a tax obligation.
For example, assume Sam wants to buy a piece of furniture listed for $10,000 by a PayPal merchant. Sam doesn’t have US dollars to make the purchase so he uses 1 bitcoin (BTC) he owns. Sam purchased this 1 BTC for $4,000 a few years ago and now it’s worth $10,000. When Sam initiates the transaction through PayPal, Paypal converts this 1 BTC into $10,000 USD and transfers the funds to the merchant. At the time of the conversion, Sam would face a taxable event and have to pay taxes on $6,000 ($10,000 – $4,000) of long-term capital gains. Taxes would roughly equate to $900 ($6,000 * 15%).
It’s Your Responsibility To Calculate Taxes
“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”.
Although these transaction history statements are useful, they can’t be fully relied upon for calculating taxes. Therefore, users need to keep detailed records of how much they paid for the coins, 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. Unfortunately, the Information reported on this form will not be sufficient to fill out Form 8949 and Schedule D.
It’s also noteworthy to mention that according to PayPal’s terms (at least at launch), the service will not let users withdraw cryptocurrency to their own wallets. If a user wants to close the PayPal crypto account, they will have to inevitably sell the cryptocurrency in the account triggering another taxable event.
“You must sell any Crypto Assets in your Cryptocurrencies Hub before closing your Cash Account and Cryptocurrencies Hub” – PayPal Cryptocurrency, Terms and Conditions
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.