Online payment platform PayPal has launched a cryptocurrency hub that makes it easier than ever to get your hands on some digital coins, but America’s tax laws haven’t caught up yet, so there are some pitfalls to be aware of.
PayPal’s Cryptocurrency Hub
Online spenders and investors have been crying out for PayPal to support the trading of Bitcoin and other cryptocurrencies for many, many years. So when the company launched its hub in October 2020, there was an instant spike in Bitcoin trading and, overall, it was very positive for the cryptocurrency market.
The hub gives access to residents of the USA, minus Hawaii, who have personal banking or cash accounts to keep a balance of cryptocurrency on their PayPal account. This effectively lets them buy and sell cryptocurrencies through the online payment platform rather than having to use an exchange. There is also a convenient section that provides market information and educational content on crypto trading.
Unfortunately, at this stage, you are still unable to pay for goods or services with cryptocurrency via PayPal, nor can you transfer any to friends or family. Perhaps most importantly, you are also unable to withdraw cryptocurrency from the hub to place it in an external wallet which, if allowed, would be a simple solution to all of the above issues.
Growth in 2020
PayPal has had a phenomenal year in 2020. The number of people working from home or otherwise making the majority of the purchases online has seen the company break just about every important record, including total transactions, the payment volume, and earnings.
As a result of this growth, it has a near-ubiquitous presence in any industry that operates online from retail and food to travel and gaming. It’s almost impossible to find a reputable website that does not accept PayPal.
The company’s influence is so significant that when it finally opened a hub for users to buy and sell cryptocurrency, there was an instant and significant jump in the price of Bitcoin. Towards the end of 2020, the price of Bitcoin was nearing the record highs it hit in 2017.
It did this by building its reputation as a completely safe and reliable way to transfer money online, which is a huge deal considering the amount of uncertainty that comes with sending your hard-earned cash out onto the internet. E-commerce marketplaces such as eBay and Etsy offer PayPal as an option due to its security and convenience. All of these factors have also made the company popular in the iGaming industry that features countless PayPal betting sites, such as 888Casino or Sun Vegas.
Cryptocurrency Hub and Taxes
Unfortunately, tax laws in America haven’t entirely caught up when it comes to cryptocurrency, and they are treated effectively as if they were property as per the Internal Revenue Services’ current regulations. While this might make a bit of sense at first glance, considering they have appreciating and depreciating value that is more volatile than regular money, it creates a fair amount of hassle with regards to crypto trading.
In effect, what this means is that every single time you buy, sell, exchange, or even discard cryptocurrency it is a taxable event. The same as if you were buying a house or a car. This is a huge problem for people that want to actively trade cryptocurrency of any volume.
One of the functions of the new PayPal hub is to allow people to convert crypto into fiat currency that can be used to buy and sell goods. However, every time this happens, there is a tax consequence. This is on top of the tax people pay when making whatever purchase they were planning with the fiat currency.
Tax is YOUR Responsibility
The hub provides a very detailed transaction history for each user but calculating the tax liability of any transactions is solely the responsibility of the user, not PayPal, to determine. This means you will need to keep incredibly detailed records of how much is spent on crypto, what the market price was at the time, and how long they have been held before buying or selling.
“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,” PayPal revealed in a press release about the hub.
This is also where the inability to transfer crypto from the hub to an external wallet becomes more of an issue too. That fact means to if you want to close your crypto account, you will need to sell off any digital currency in there, which will create yet another taxable event.
The ability to trade cryptocurrency via PayPal is something people have been asking for for a long time, and it certainly is a handy feature. However, it is highly recommended to consider the impact it could have on your tax return before committing to keeping your crypto on PayPal.