The news that PayPal will support cryptocurrencies has given a lot of momentum to the industry, but there are tax implications that crypto novices don’t understand.

PayPal users will soon be able to use digital assets to fund purchases from 26 million merchants around the world. The company has nearly 350 million active users worldwide, and Alex Mashinsky, CEO of cryptocurrency lending platform Celsius, predicted that the integration could lead to “millions of new users” entering the cryptocurrency.

Unfortunately, they may face a tax nightmare due to the volatile nature of cryptocurrencies and tax reporting requirements.

According to the Internal Revenue Service (IRS), digital assets like Bitcoin are real estate, not currencies. This means that every time you sell, exchange, or dump a cryptocurrency to buy something else, it becomes a taxable event. In a press release, PayPal stated that it will act as an exchange as well as a payment gateway;

“Consumers will immediately be able to convert their chosen cryptocurrency balance to fiat currency safely and without additional charges.”
However, it does not allow withdrawing cryptocurrencies from the platform and sending them to the bank or returning them to the wallet from which they were received. Selling cryptocurrency with PayPal creates a taxable event, as is the case with buying cryptocurrencies, where PayPal converts money into paper money first before it pays the merchant.

Since Bitcoin and crypto assets are volatile, users will be responsible for a substantial capital gain tax on the amount acquired from the asset since it was purchased and used.

This is not a problem as long as users keep records and defer taxes, but most new users do not understand the tax implications and requirements. Finally, according to Cryptotrader tax, gains and losses must be reported on IRS Form 8949 and filed with tax returns each year.

Use the example of buying a new TV from a PayPal seller with 0.1 BTC as payment. The consumer will make a profit (or loss) depending on the change in the value of 0.1 BTC since the first purchase or purchase. Suppose 0.1 is now $ 1,000 more than it was when you bought it:

“You must report this profit on your tax return, and depending on the tax class you belong to, you pay a certain percentage of tax on this profit.”
PayPal clarified that it would be involved in compiling relevant tax information for 1099 users, but said that individuals are responsible for their own tax matters:

It is your responsibility to determine which taxes, if any, are applicable to transactions that you make using the cryptocurrency center. You can access transaction history and account information through your PayPal account to determine any tax records or payments required.
The US tax authorities will likely require access to user account information to find out which users should report earnings.

PayPal will initially only offer the new cryptocurrency payment services to account holders in the US, but it could roll out globally next year.

The UK has a similar effect on tax revenue as well, and HMRC (Her Majesty’s Revenue and Customs) began actively pursuing cryptocurrencies in late 2019. Australian cryptocurrency dealers and investors are also subject to a capital gains tax and even income tax if they digitally earn the assets. Reporting is required in both countries.

Source: CoinTelegraph

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