The Tax Implications of PayPal’s Foray Into Crypto

PayPal officially announced that it will be making its foray into the world of crypto by allowing its customers to buy, sell, and spend cryptocurrencies within the PayPal app (also rolling out to Venmo in the first half of 2021).

No matter how you view the announcement, this is a net-positive for crypto—PayPal and its 346 million active accounts will surely bring further adoption and awareness to the asset class.

One element that should not be overlooked with this announcement is the tax implications of PayPal’s cryptocurrency hub. Millions of potential users who chose to use the service to buy and sell cryptocurrencies will face these tax consequences. We take a close look at the tax effects of PayPal’s crypto hub in this article.

An Overview of Cryptocurrency Taxes

The IRS treats cryptocurrencies as property for tax purposes, not as currency. Like other forms of property—stocks, bonds, real estate—you incur a tax reporting requirement when you sell, trade, or otherwise dispose of your cryptocurrency. 

For example, if you purchased 0.2 Bitcoin for $2,000 in January of 2019 and then sold it two months later for $3,000, you have a $1,000 capital gain. You must report this gain on your tax return, and depending on what tax bracket you fall under, you pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain. This applies for all cryptocurrencies.

For a deep dive on the fundamentals of crypto taxes, checkout our Complete Crypto Tax Guide.

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What Does This Mean For Future PayPal Crypto Users?

Just like with any cryptocurrency exchange, PayPal users who sell, spend, or otherwise dispose of their cryptocurrency on the PayPal cryptocurrency hub will incur tax reporting requirements.

For example, if you use 0.1 bitcoin to purchase a new TV from one of PayPal’s 26 million merchants, you would incur a capital gain or loss depending on the value change of that 0.1 bitcoin since you first purchased or acquired it. 

The same is true if you sell your crypto on the PayPal platform.

Your gains and losses ultimately need to be reported on IRS Form 8949 and submitted with your tax return each year. 

As a result of these requirements, thousands of crypto users are turning to specialized crypto tax software to automate the tax reporting process. It’s likely this trend will continue with PayPals entrance into the scene.

The Catch - PayPal is Not Allowing Crypto Deposits or Withdrawals At This Time

Similar to other fintech giants that have already added cryptocurrency capabilities to their applications (i.e. Robinhood, Revolut), PayPal explains in its crypto documentation that it will not allow users to make cryptocurrency deposits and withdrawals on its platform. 

Essentially, your crypto is stuck inside PayPal, and you can only hold it on the platform.

While this is extremely “anti-crypto” and goes against the fundamental tenets of cryptocurrency such as self-custody and peer-to-peer transfer, this does mean that tracking cost basis will actually be easier for PayPal crypto users—which in turn makes tax reporting easier.

The cost basis tracking and reporting problems that are present in the traditional crypto world stem from the transferable nature of the asset. In the case of PayPal, if you can’t transfer your crypto in or out of the platform, it becomes fairly easy to track your cost basis and report your taxes.

We dive deep into the cost basis tracking problem that is present in traditional crypto markets in this blog post here: The Crypto Tax Problem.

1099 Information Reporting

PayPal also explains in its crypto documentation that it will be participating in relevant 1099 information reporting for users that buy, sell, and transact in cryptocurrency on its platform.

1099 information reporting has been around for a long time. There are exactly 20 different types of 1099’s in existence today (1099-B, 1099-K, 1099-DIV, etc.), and each of them serve the same general purpose: They exist to provide information to the Internal Revenue Service (IRS) about certain types of income from non-employment-related sources.

It’s not clear yet whether PayPal will follow what Coinbase and other prominent exchanges do in using 1099-K to report crypto activity for users meeting certain qualifying factors. 

Because they are operating the crypto hub as a “closed platform” and are restricting wallet transfers, it’s possible that they will report a 1099-B which is actually more helpful for tax reporting purposes. 

While it’s impossible to say for sure, it’s likely that PayPal’s 1099 information reporting will look very similar to Robinhood’s, which we address in detail in this blog post here: Robinhood Crypto Tax Reporting.

Conclusion

No matter how you slice it, PayPal’s entrance into cryptocurrency is a huge positive for the cryptocurrency industry. 

PayPal users will be subject to the same tax reporting rules as users of traditional exchanges. The entire team at CryptoTrader.Tax is here to make this a seamless process for any crypto user, and we will continue to monitor PayPal’s entrance into the space as well as the tax implications you need to be aware of. 

Do you have any crypto tax questions? Our live-chat customer support team would be happy to help! Speak with us directly via the chat widget on our homepage.