Starting in early 2021, PayPal customers can buy, sell and trade select cryptocurrencies using their PayPal and Venmo online wallet accounts. Shoppers will also be able to use crypto to purchase goods and services using their PayPal account, according to Reuters last week.
For the 26 million merchants participating in the PayPal network, expanding payment methods to include cryptocurrency offers them an opportunity to expand sales to more consumers around the world. And for crypto enthusiasts, it’s another platform that can be used to buy and sell cryptocurrencies with the possibility for them to realize gains.
What are the tax implications for crypto investors?
Crypto investors should know by now that they are required to report and pay income tax related to gains from selling and trading crypto assets. With PayPal, investors won’t be able to transfer their crypto holdings out to other exchanges or wallets—which means that every crypto transaction where the asset is disposed of (i.e., sold or traded) will need to be reported by both PayPal and the crypto investor.
In the last few years, the IRS has ramped up enforcement associated with crypto investors that do not report and pay income taxes. In addition to sending enforcement letters to over 10,000 taxpayers last summer, over the last 12 months the IRS has invested in expertise and technology to consume and process crypto related tax information. And again, this summer the IRS sent another round of taxpayer enforcement letters, all clear signs that the agency is prioritizing crypto tax compliance.
Crypto investors need to utilize Form 8949 and Schedule D in order to report crypto gains and losses. This requires significant tracking of every single date that crypto assets were purchased, sold, and their corresponding values. In some cases, a single taxable event could span over several ‘transactions’ reported on details typically provided by exchanges so taxpayers need to be savvy enough to sift through that data and aggregate transactions for purposes of calculating correct gains and losses. Most crypto investors require the expertise of a third-party accountant or crypto tax software to aid in this process.
In traditional markets, investors in assets receive 1099 information that aids in the process of preparing income taxes at year-end. In fact, Form 8949 and Schedule D refer the taxpayer to use their Form 1099-B information for purposes of tax compliance. However, the ongoing issue in this area of crypto tax is that exchanges and other payors do not issue Form 1099-B. Some exchanges don’t issue any 1099 forms at all. Other exchanges issue Form 1099-K for these transactions. Still others issue Form 1099-B but don’t include all of the tax details needed.
The IRS is working on this conflict. Earlier this year, the IRS announced they were drafting regulations under internal revenue code §6045 to require payors of crypto transactions to report Form 1099-B. But that change won’t happen overnight—so crypto investors should expect to live with this ongoing tax issue for at least one more tax season.
As for PayPal, they haven’t said exactly which form it plans to issue but did reiterate that individuals are responsible for their own tax affairs, saying “It is your responsibility to determine what taxes, if any, apply to transactions you make using your Cryptocurrencies Hub. You can access your transaction history and account statements through your PayPal account for purposes of determining any required tax filings or payments.”