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PayPal’s decision last week to embrace crypto may help with mainstream adoption, but it could also mean additional tax work for users unfamiliar with the crypto landscape.
In the coming weeks, PayPal will roll out cryptocurrency buying, selling, and storing functionality on its platform for US users, but the service will not allow users to withdraw or deposit holdings.
According to the rules of the Internal Revenue Service, cryptocurrencies such as bitcoin (BTC) are treated as property; therefore, whenever someone buys, sells or trades a digital asset, this is considered a taxable event where capital gains tax applies.
Under PayPal’s plans to make cryptocurrencies a “source of funding” for purchases from its 26 million merchant customers, this will also apply to situations such as paying for a cup of coffee using BTC via PayPal, where the transaction it could result in a gain or loss of a few cents. Since PayPal said transactions with merchants would be settled in fiat, a tax obligation is created every time the platform converts a user’s encryption into cash.
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“Accounting on this would be a huge headache,” said Stephen Turanchik, a tax attorney at the Paul Hastings law firm and a member of AICPA’s virtual currency task force. He pointed out that regardless of the encryption involved, PayPal and Venmo can add a lot of accounting work due to the variety of transactions that occur on these platforms.
Adding cryptocurrencies to the mix could make it more difficult to capture all transactions and related capital gains or losses, especially if users combine business and personal payments on these platforms.
According to Kirk Phillips, a certified public accountant (CPA), while PayPal can help launch the cryptocurrency adoption, tax ripple effects are also likely to hinge on good reporting work. As a payment processor, PayPal must issue Form 1099-K to users and the IRS if an account holder’s total proceeds exceed $ 20,000 and include more than 200 transactions in a calendar year.
Regardless of whether they meet this requirement, all users will also be able to see their transaction history and account statements via their PayPal account.
While the forms and transaction history can be useful, these documents may not be sufficient for tax purposes because users will also need to keep track of the base price they purchased the digital asset for, how much they have spent on it, how long it has been withheld before being sold and the price for which it was sold.
Venmo, widely used for small purchases, could complicate this path a little more.
“We will see more and more micro purchases and the importance of some sort of de minimis (too minor to warrant consideration) the exception could become major, “said Lisa Zarlenga, co-chair of the tax group at Steptoe & Johnson LLP law firm.
Read More: PayPal’s Move Is Good For Crypto Adoption But Not So Much For Profits: Morgan Stanley
He pointed out that these transactions are currently treated as capital gains or losses, no matter how small, and therefore are taxable events.
A best practice for users might be to focus on keeping well-kept records of their cryptographic interactions, he said.
While PayPal’s embrace of cryptocurrency promises to bring digital assets to a mainstream user base, the stringent tax regulations could also lead to early stumbles by some of them. For now, a simple practice to start with would be to avoid using emoticons in the reminder line for Venmo or PayPal transfers.
