News that payment company PayPal will support cryptocurrencies has given the industry a big boostHowever, there are tax implications that are poorly understood by crypto newbies.
PayPal users will soon be able to use digital assets as a source of funding for purchases from their 26 million merchants worldwide. The company has nearly 350 million active users worldwide, and Alex Mashinsky, CEO of crypto lending platform Celsius, predicted so The integration could lead to “millions of new users” entering the world of cryptocurrencies.
Unfortunately, could face a tax nightmare stemming from the volatility of crypto assets and tax reporting requirements.
According to the Internal Revenue Service (IRS), digital assets like Bitcoin are treated as property, not currency. This means that Any time a cryptocurrency is sold, exchanged, or available to buy something else, it becomes a taxable event. PayPal’s press release states that it will act as an exchange in addition to a payment gateway:
“Consumers can instantly convert their balance of selected cryptocurrencies into fiat currencies for value security and without additional fees.”
However, cryptocurrencies cannot be withdrawn from the platform and sent to a bank or back to the wallet they came from.. Selling cryptocurrencies within PayPal will trigger a taxable event, as will using cryptocurrencies to purchase items, as PayPal converts the funds to “fiat” first before paying the seller.
Because bitcoin and cryptocurrencies are volatile, Users are liable for substantial capital gains taxes on the amount the asset earned between acquisition and issue.
That’s not a problem as long as users keep records and set taxes aside, however Most new users are unlikely to understand the tax implications and requirements. Profits and losses must be reported on IRS Form 8949 and filed on tax returns each year, according to Cryptotrader.tax.
Uses an example of buying a new TV from one of the PayPal sellers with 0.1 BTC as payment. The consumer would experience a capital gain (or loss) depending on the change in value of this 0.1 BTC since the first purchase or acquisition. Let’s say the 0.1 is now worth $ 1,000 more than it was when you bought it:
“You have to declare this profit in your tax return. Depending on the tax range you are in, you pay a certain percentage of the tax on the profit.”
PayPal stated that it will participate in reporting 1099 user-relevant tax information, however These people are responsible for their own tax affairs::
“It is your responsibility to determine what taxes, if any, will apply to the transactions you make using your cryptocurrency hub. You can access your transaction history and bank statements through your PayPal account to help you determine the required tax or payment returns. ”
The US tax authorities will likely need access to user account information to see which users should report revenue.
Initially, PayPal will only offer its new crypto payment services to US account holders., but it could be rolled out globally next year.
The UK has a similar impact on capital gains taxes and HMRC (Her Majesty’s Income and Customs) began actively tracking crypto traders in late 2019. Australian cryptocurrency traders and investors are also subject to capital gains tax and even income tax when receiving digital assets. Reporting is required in both countries.