Wondering how stablecoins are taxed in your jurisdiction?
Stablecoins have increased in popularity in recent years and are now a more significant element of the cryptocurrency world. It was predicted that stablecoins would conduct $1.7 trillion worth of transactions during Q2 2021.
Right now, you could be using stablecoins like USDC, Tether, or DAI in your transactions. We’ll go through how to report these transactions on your tax return in this post.
What is a stablecoin, and how does it differ from regular cryptocurrencies?
Many crypto investors are hesitant to utilize virtual currencies like Bitcoin and Ethereum for everyday purchases. Many consider these assets to be long-term investments and don’t want to spend them, incur capital gains, or miss out on future price increases.
Stablecoins were created to address this issue and give cryptocurrency users a currency they could use on a regular basis.
Stablecoins aren’t meant to gain in value over time; instead, they’re intended to track the cost of external commodities or currencies. Stablecoins have been developed that track gold, oil, and the South Korean Won as reference prices. However, the majority of popular stablecoins are linked to the dollar’s value.
How is stablecoin activity taxed?
Despite the fact that stablecoins were created to be utilized in routine purchases, they are handled equally by the IRS as any other cryptocurrency.
Buying a decent or service with a stablecoin/trading a stablecoin for another cryptocurrency is considered taxable.
You will have to pay capital gains taxes based on the price fluctuations of your stablecoins. Because most popular stablecoins are intended to track the value of the US dollar, it’s probable that your capital gain will be near zer o. However, you should record all of these transactions on your tax return.
Trading cryptocurrency for stablecoin
The disposal of a cryptocurrency for a stablecoin is called a trading event. Depending on the price movement of your assets since you received them, you will have capital gains or losses.
Receiving stablecoin as a payment
If you accept stablecoin as payment for your products and services, you must declare it as ordinary income. Depending on where you fall in the tax bracket for the year, your tax rate on these earnings will vary.
What if I’m transferring stablecoin between wallets?
You should not report on your tax return the transfer of stablecoins between wallets, which is a non-taxable event.
How is stablecoin interest taxed?
Users of popular cryptocurrencies such as BlockFi and Celsius can make money by investing in a stablecoin. Your bonuses in this case will be classified as regular income and taxed accordingly.