How do Crypto Taxes work?
Cryptocurrencies such as bitcoin are considered property under IRS regulations. This means that any time you sell, exchange, or dispose of cryptocurrency to buy something, you are engaging in a taxable transaction. Crypto taxes will be levied on the owner of such cryptocurrency. Users will be able to “instantly convert their chosen cryptocurrency balance to fiat currency, with the certainty of value and no incremental fees,” according to the Paypal announcement.
This means that whenever a user purchases a product or service from a merchant, PayPal will convert the cryptocurrency to fiat, resulting in a tax liability for the user. The best part is that merchants will be able to accept a new payment method without having to worry about additional taxes or the complexities of cryptocurrency accounting because PayPal crypto hub will allow users to deal with PayPal crypto taxes and generate cryptocurrency on the user’s behalf while paying the merchant in fiat currency.
What is the PayPal crypto hub?
PayPal announced the launch of the PayPal crypto hub in October 2021. This new service would allow PayPal customers all over the world to buy, sell, and store cryptocurrency, spend it at any of PayPal’s 26 million merchants as well as deal with PayPal crypto tax through the hub. Users will be able to buy and sell four different cryptocurrencies through the PayPal crypto hub, including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.
When you buy cryptocurrency with PayPal, you cannot move it off the platform like you can with traditional crypto exchanges and wallets. This is due to the fact that with PayPal crypto tax is bound to occur as you only have access to the public address of your cryptocurrency, not the private key. This means that the platform is useful for those who want to buy HODL crypto in PayPal, or even sell more frequently as the market fluctuates. However, it is of little use to investors who want to move their crypto between wallets and exchanges in order to use their crypto for other investments such as staking, lending, or DeFi protocols.
How do you report PayPal crypto taxes?
Capital gains and losses in cryptocurrency are reported to the IRS as part of your Individual Tax Return. On Schedule D of IRS Form 8949, you must list each disposal (sale or spend) as well as your net capital gains and losses. Because PayPal’s crypto assets are ‘locked’ within the platform, tax reporting for PayPal crypto is much simpler. Often these cryptocurrency platforms allow you to move your cryptocurrency between exchanges and wallets, as well as wrap coins to move them across blockchains. This makes tracking things like cost basis and subsequent capital gains and losses difficult.
However, because all of your cryptocurrency in PayPal is locked up – this isn’t an issue for those using the PayPal crypto hub, which may explain why PayPal decided to keep custody of private keys. This means that PayPal will be able to provide users with accurate 1099 forms to assist them in reporting their cryptocurrency taxes.
Example: Using bitcoin to buy a car on PayPal
John wishes to purchase a $1,500 car from a PayPal merchant. To complete the payment, John uses three Litecoins that he has in his PayPal wallet. John paid $300 for this Litecoin a few years ago, and it is now worth $1,500. When John initiates the payment, PayPal converts the three Litecoins into $1,500 (fiat currency) and transfers the funds to the merchant.
It is your responsibility to determine whether or not any taxes apply to transactions made through your Cryptocurrencies Hub. You can view your transaction history and account statements in your PayPal account to determine your PayPal crypto taxes and any required tax filings or payments. As a result, John at this taxable event must pay long-term capital gains tax on $1,200 ($1,500 – $300) at the time of the conversion. Taxes would be approximately $180 ($1,200 x 15%).
It’s also worth noting that, at least initially, PayPal will not allow cryptocurrency withdrawals from your PayPal wallet to any other wallet. If a user wishes to close their PayPal crypto account, they must sell the cryptocurrency in the account, resulting in a taxable event.
1. Can you transfer Bitcoin to PayPal?
Yes, PayPal initially prohibited such transactions, but users can now add Bitcoin to their PayPal account/wallet. You can also transfer cryptocurrency from other wallets into PayPal and to other PayPal users.
2. What are PayPal crypto fees?
The platform’s simplicity has a positive side effect: it means that paying PayPal crypto taxes or fees is simple. Each transaction will incur a fee, just like any other cryptocurrency. When you buy or sell cryptocurrency on the PayPal crypto hub, you will be charged the following fees. Meanwhile, when you spend cryptocurrency through PayPal, it converts it to USD automatically, so there are no fees for using this service.
|$1 – $24.99||$0.50|
|$25 – $100||2.30%|
|$100.01 – $200||2.00%|
|$200.01 – $1,000||1.80%|
3. How much crypto can I buy on PayPal?
You can purchase cryptocurrency for as little as $1 or as much as $100,000 per week. The investor has to keep in mind that this will include the fees that have to be paid for specific transactions as well.