Wondering how much tax you’ll pay on your stablecoin transactions?
In recent years, stablecoins have become a more and prominent part of the crypto ecosystem. In Q2 of 2021, it was estimated that stablecoins had a stunning transaction volume of $1.7 trillion.
In this guide, we’ll break down everything you need to know about how stablecoins like DAI, USDT, and USDC are taxed. Whether you’re trading stablecoins, earning stablecoin income, or converting your crypto into stablecoin, we’ll break down exactly how you can report your transactions on your tax return.
What is a stablecoin?
Many crypto investors are hesitant to use cryptocurrencies like Bitcoin and Ethereum in everyday transactions. After all, some consider these assets to be long-term investments and do not want to spend them, incur capital gains, and miss out on future price appreciation.
Stablecoins were designed to solve this problem and give cryptocurrency users a currency they could use to make day-to-day purchases.
Stablecoins are not intended to increase in value over time — instead, they are designed to track the costs of external commodities or currencies. There are currently stablecoins that track assets like gold, oil, and the South Korean Won. However, most popular stablecoins track the price of the U.S. dollar.
How is stablecoin activity taxed?
Despite the fact that stablecoins were designed to be used in everyday transactions, they are not treated differently than any other cryptocurrency from a tax perspective.
Like other cryptocurrencies, stablecoins are subject to capital gains and ordinary income tax.
Is trading stablecoins for other stablecoins a taxable event?
Trading a stablecoin for another cryptocurrency is considered a taxable event.
You will incur capital gains based on how the price of your stablecoins has fluctuated since you originally recieved them. Since most popular stablecoins are designed to track the price of the U.S. dollar, it’s likely that your capital gain will be close to 0. Still, you are required to report these transactions on your tax return.
Additionally, you are likely to incur exchange fees or blockchain network fees while trading with stablecoins. These fees can be included when calculating your gain or loss from disposals and will reduce your taxable income.
Is converting crypto to stablecoin a taxable event?
Trading cryptocurrency such as Bitcoin or Ethereum for stablecoin is considered a disposal event. You will incur capital gains or capital losses depending on how the price of your assets has changed since you originally received them.
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Is using stablecoins to make a purchase a taxable event?
Using a stablecoin to make a purchase is considered a disposal event subject to capital gains tax.
Receiving stablecoin as a payment
If you receive stablecoin as payment for your goods and services, you’ll be required to report it as ordinary income. Your tax rate on these earnings will vary depending on what tax bracket you fall into for the year.
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What if I’m transferring stablecoin between wallets?
Transferring stablecoins between wallets is not considered a taxable event and should not be reported on your tax return.
How is stablecoin interest taxed?
Many popular crypto applications like BlockFi allow users to earn interest in stablecoin. In this case, your rewards will be considered ordinary income and will be taxed accordingly.
Can I claim a loss if the value of my stablecoins declines significantly?
In 2022, the Terra stablecoin collapsed and lost its peg with the U.S. dollar.
In cases like these, you can dispose of your stablecoin and claim a capital loss on your tax return. This can be used to offset your capital gains for the year and up to $3,000 of income.
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How do I report stablecoin taxes on my tax return?
Capital gains and losses from stablecoins and other cryptocurrencies should be reported on Form 8949.
Stablecoin income should be reported as ‘Other income’ on Schedule 1 of Form 1040.
How to make filing your crypto taxes stress-free
Whether you’re doing transactions in stablecoins, making trades in Bitcoin, or buying NFTs with Ethereum, one thing remains true: doing your crypto taxes is incredibly complicated.
Crypto tax software can help. Whether you’re using exchanges like Coinbase or blockchains like Ethereum, you’ll be able to import your transactions in minutes.
Join the 400,000 investors across the globe who trust CoinLedger — there’s no need to enter your credit card information until you’re 100% sure your transaction history is accurate!
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Frequently asked questions
Do I have to pay taxes on stablecoins?
Yes. Stablecoin income and stablecoin disposals are subject to tax.
Can USDT be taxed?
Like other cryptocurrencies, stablecoins like USDT are subject to ordinary income and capital gains tax.
Is swapping to a stablecoin taxable?
Yes. Swapping cryptocurrency for a stablecoin is considered a disposal event subject to capital gains tax.
Is converting BTC to UDSC a taxable event?
Yes. In this case, you’ll incur a capital gain or loss depending on how the price of your BTC has changed since you originally received it.
Can I use stablecoins like Tether to avoid taxes?
There’s no way to legally evade taxes using stablecoins. Remember, tax evasion is a serious crime with serious consequences.
As an enthusiast with in-depth knowledge of cryptocurrency taxation, I've been closely following the evolution of stablecoins and their impact on the crypto ecosystem. The surge in stablecoin transaction volume, reaching $1.7 trillion in Q2 2021, underscores their growing significance in the digital asset space. Now, let's delve into the various concepts highlighted in the article:
1. What is a Stablecoin?
Stablecoins address the hesitancy of some crypto investors to spend assets like Bitcoin and Ethereum due to their perceived long-term investment value. Unlike volatile cryptocurrencies, stablecoins are designed to maintain a stable value, typically pegged to external commodities or currencies. While some track assets like gold or oil, the most popular stablecoins, including DAI, USDT, and USDC, often peg their value to the U.S. dollar.
2. Taxation of Stablecoin Activity:
Stablecoins, despite their intended use in everyday transactions, are treated similarly to other cryptocurrencies concerning taxation. Both capital gains and ordinary income tax are applicable to stablecoin transactions.
3. Taxable Events Involving Stablecoins:
- Trading Stablecoins: Exchanging one stablecoin for another or trading stablecoins for different cryptocurrencies constitutes a taxable event. Capital gains or losses are calculated based on the fluctuation in stablecoin prices.
- Converting Crypto to Stablecoin: Swapping cryptocurrencies like Bitcoin or Ethereum for stablecoins is considered a disposal event, leading to capital gains or losses.
- Using Stablecoins for Purchases: Making purchases with stablecoins is also considered a disposal event, subject to capital gains tax.
4. Stablecoin Interest Taxation:
Earning interest in stablecoins through platforms like BlockFi is treated as ordinary income and is subject to taxation.
5. Loss Claims and Capital Gains Offset:
In cases where stablecoins experience a significant decline, such as the Terra stablecoin collapse, users can claim a capital loss on their tax return. This loss can be used to offset capital gains for the year and up to $3,000 of income.
6. Reporting Stablecoin Taxes:
- Capital Gains and Losses: These should be reported on Form 8949.
- Stablecoin Income: Reported as 'Other income' on Schedule 1 of Form 1040.
7. Crypto Tax Software:
The article emphasizes the complexity of crypto tax filing and suggests using crypto tax software like CoinLedger to simplify the process. This software allows users to import transactions from various platforms, including exchanges and blockchains.
8. Frequently Asked Questions (FAQs):
The FAQs address common concerns about stablecoin taxation, emphasizing that stablecoin income and disposals are indeed subject to tax. Attempting to use stablecoins to avoid taxes is highlighted as illegal, with a reminder that tax evasion carries serious consequences.
In summary, the article provides a comprehensive guide on how stablecoins are taxed, covering various scenarios and offering practical advice on reporting and using crypto tax software to streamline the process.
