Does PayPal report cryptocurrency to the IRS?

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Does PayPal report cryptocurrency to the IRS?
Does PayPal report cryptocurrency to the IRS?

The Internal Revenue Service has mandated that all payment systems operating in the United States (including PayPal) provide the IRS with information about customers who make payments using their platform. For tax reasons, the IRS considers cryptocurrency holdings to be “property,” which means your virtual currency is taxed in the same way as any other assets you own, such as stocks or gold.

Paypal began allowing consumers to purchase and sell bitcoin on its platform for as little as $1 in 2021. The user-friendly interface of Paypal makes it easier than ever for new investors to dabble in an intriguing new asset class. Of course, one aspect of crypto investing remains as challenging as ever: dealing with the tax implications. 

We’ll go over all you need to know regarding cryptocurrency taxes on PayPal, whether you’re buying, selling, holding, or making purchases.

Taxes on Cryptocurrencies: A Quick Overview

For taxation purposes, the IRS does not view cryptocurrencies as money, but rather as property. When you sell, trade, or otherwise dispose of your cryptocurrencies, just as when you do with stocks, bonds, or real estate, you have tax liabilities.

You must include this gain in your tax return and pay taxes on a specified portion of your gain. Your crypto tax rate varies depending on a number of variables, including your tax bracket and whether it was a short-term or long-term gain. All cryptocurrencies fall under this.

Virtual currencies’ taxable value is determined by capital gains or losses because the IRS views them as property; in other words, it depends on how much value your holdings increased or decreased within a specific time period. Because you’re using a capital asset to buy something or another item, capital gains taxes apply to transactions involving trading cryptocurrencies or using them to make purchases.

According to PayPal’s crypto guidelines, users who buy, sell, or transact in cryptocurrencies on its platform must participate in 1099 information reporting. PayPal issues 1099-K forms to users when they complete 200+ transactions in a calendar year and their gross payment volume exceeds $20,000. These forms are sent to both the user and the IRS.

On the other hand, these forms solely display the users’ gross income for a certain tax year. Investors must keep track of every bitcoin transaction in order to properly file their cryptocurrency taxes. Your transaction history and account statements may contain this data.

PayPal Crypto Taxes and the IRS

PayPal details how it engages in pertinent 1099 information reporting for users who buy, sell, and conduct bitcoin transactions on its platform in its cryptocurrency documentation.

The practice of 1099 information reporting is not new. The almost two dozen distinct varieties of 1099s available today (1099-B, 1099-K, 1099-DIV, etc.) all have the same fundamental function: They exist to tell the Internal Revenue Service (IRS) about specific categories of income from sources unrelated to work.

At the moment, if a user has more than 200 transactions for the year and a gross payment volume of more than $20,000, PayPal distributes 1099-K forms. The IRS and the user both receive these forms.

However, these forms only display the users’ gross earnings for the tax year. Investors must maintain records of each cryptocurrency transaction in order to correctly file their crypto taxes. Your account statements and transaction history will contain this information.

PayPal claims that the gains and losses on bitcoin disposals made via the HIFO method will be reflected in your account statements. See our article on HIFO and other accounting techniques for additional details.

What Does This Mean For Crypto Users On PayPal?

Users of PayPal who sell or otherwise dispose of their cryptocurrencies on the PayPal cryptocurrency hub are subject to tax reporting obligations, just like with any cryptocurrency exchange. In the end, you must fill out IRS Form 8949 and include it with your annual tax return to declare your gains and losses.

Numerous crypto users are using specific crypto tax software to automate the tax reporting process as a result of these regulations. This tendency is probably going to continue now that PayPal has entered the market.

Paypal has a service called Checkout with Crypto. Customers of PayPal can take advantage of this function to convert their bitcoin into money during the checkout process and use it as payment. Keep in mind that exchanging bitcoin for money is regarded as a taxable event. Depending on how the price of your cryptocurrency has changed since you first received it, you either make capital gains or losses.

PayPal Crypto Taxes 

You should be aware that you cannot transfer your bitcoin out of PayPal, in contrast to common crypto exchanges and wallets. As a result, PayPal only provides you with access to the public address of your cryptocurrency and not its private key. In essence, PayPal is the only place where you may hold your cryptocurrency.

Although this is blatantly “anti-crypto” and goes against the core principles of cryptocurrencies like self-custody and peer-to-peer transfer, it actually makes it simpler for PayPal crypto customers to manage cost basis, which in turn makes tax filing easier. Because the asset is transferable, there are issues with cost basis tracking and reporting in the traditional crypto space. In the instance of PayPal, it becomes rather simple to track your cost basis and file your taxes if you are unable to transfer your cryptocurrency into or out of the platform.

As a result, PayPal is the perfect choice for investors who want to buy, HODL, and then occasionally sell their crypto assets in order to keep up with the volatile market. However, it is of limited utility to any investor who wishes to move their cryptocurrency between wallets and exchanges in order to use it for staking, lending, or DeFi protocols.

Now let’s talk about one of the most crucial elements:

PayPal cryptocurrency taxes. Only the three types of transactions—buying and selling—and holding are permitted. Following are the various tax rates for each:

Crypto activityTaxability
Holding cryptocurrencyNot taxable
Purchasing cryptocurrencyNot taxable
Purchasing goods and servicesCapital gains tax
Selling cryptocurrencyCapital gains tax

The Internal Revenue Service’s Notice 2014-21 determines whether cryptocurrency is taxable.

It is evident from the table above that holding and acquiring cryptocurrencies are tax-free. You will, however, have to pay capital gains taxes when you sell or buy other products and services in exchange for your cryptocurrency assets.

Conclusion

Now that you’ve learned everything there is to know about PayPal crypto taxes, you’ll need to record them on your individual tax return, just like your other taxes.

As previously stated, PayPal’s ‘locking’ of cryptocurrency within its platform actually simplifies tax reporting for PayPal crypto. Most crypto platforms allow you to transfer currencies between wallets and exchanges, as well as across blockchains.

Related: https://fxcryptonews.com/are-crypto-wallets-taxable/