Beginning in 2021, PayPal allowed its users to start buying and selling cryptocurrency on its platform for as little as $1.
PayPal’s user-friendly interface makes it easier than ever for new investors to dip their toes in an exciting new asset class. Of course, there’s one part of crypto investing that’s still as difficult as ever: dealing with the tax consequences of your transactions.
In this article, we’ll break down everything you need to know about cryptocurrency taxes on PayPal — whether you are buying, selling, holding, or making purchases.
An Overview of Cryptocurrency Taxes
Cryptocurrency is subject to capital gains and ordinary income tax.
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It’s important to remember that there’s no tax for holding your crypto or transferring it between different wallets that you own.
For a deep dive into the fundamentals of crypto taxes, check out our ultimate guide to cryptocurrency tax.
How do I report my PayPal transactions on my taxes?
You will be subject to capital gains tax when you sell crypto on PayPal. When you sell or dispose of your cryptocurrency, you’ll recognize a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
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Once you’ve calculated your capital gains and losses from cryptocurrency disposals, you can report them on Form 8949.
Do I pay tax when I use crypto to make a purchase on PayPal?
PayPal currently offers a Checkout with Crypto feature. By using the feature, PayPal customers can convert their cryptocurrency into fiat during the checkout process and use it for payment.
Remember, converting your cryptocurrency to fiat is considered a taxable event. You incur capital gains or losses depending on how the price of your crypto has fluctuated since you originally received it.
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How do I report my taxes if I transferred my cryptocurrency?
In June 2022, PayPal gave customers the ability to transfer their cryptocurrency holdings to different exchanges and platforms.
While introducing transferability is a net positive for PayPal customers, it’s important to remember that transferring your crypto between different wallets and exchanges can lead to tax reporting issues.
For example, consider the following scenario.
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In this case, Exchange B won’t know Gary’s cost basis for acquiring his crypto. If Gary hasn’t kept records of his original cost basis, he may be required to recognize the entire sale of $1,500 as a capital gain.
For this reason, many investors choose to use crypto tax software like CoinLedger. The platform can aggregate your capital gains, losses, and income across all of your wallets and exchanges and help you generate a complete tax report in minutes.
Does PayPal report to the IRS?
In its crypto documentation, PayPal explains that it participates 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 nearly two dozen different types of 1099’s in existence today (1099-B, 1099-K, 1099-DIV, etc.), and each of them serves 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.
At this time, PayPal sends 1099-K forms if a user’s gross payment volume exceeds $600. These forms are sent to both the user and the IRS.
However, these forms only show users’ gross proceeds in a given tax year. To properly report crypto taxes, investors need to keep records of each individual cryptocurrency transaction. This information can be found in your transaction history and account statements.
According to PayPal, your account statements will show you your gains and losses on cryptocurrency disposals using the HIFO method. For more information, check out our guide to HIFO and other accounting methods.
File your cryptocurrency taxes today
Looking for an easy way to take the stress out of crypto tax reporting? Try CoinLedger. The platform can import your transactions from platforms like PayPal and blockchains like Ethereum to save hours of time and effort during tax season.
More than 500,000 investors around the world use CoinLedger to generate a crypto tax report in minutes.
