The IRS currently categorizes stablecoins as property which means that any capital gains for stablecoins are taxed. While this would make sense if the underlying assets increase in value, most of us are probably wondering if stablecoins pegged to fiat currency always represent the underlying currency, how can there be taxes?
Fiat-backed taxable situation
Although fiat-backed stablecoins are designed to maintain steady prices, perfect tracking is not often possible. Even multi-billion dollar ETFs can momentarily deviate from the underlying value they are intended to represent.
Fiat-backed stablecoins should rarely deviate enough to cause significant tax gains or losses.
As we can expect, a commodity pegged stablecoin will rack up taxes for us if the value of the underlying stablecoin increases. Let's take a look at the price of gold.
Pax Gold (PAXG) is a gold-backed cryptocurrency, launched by the creators of Paxos Standard (PAX) in September 2019. As an ERC-20 token operating on the Ethereum blockchain, Pax Gold is tradeable on a large variety of exchanges and has become an accessible way for crypto traders to start investing in gold.
Had we purchased PAXG at the same time in early August and sold at the time this graph was taken, we would owe capital gains taxes on the $100 in price difference.
Swap out the gold for another crypto and the taxes owed can be even more.
Investing in any crypto can generate taxes for us, stablecoins included. The limited price changes of fiat-backed stablecoins do not allow for big returns, but they'll limit the potential taxes owed. Fiat-backed stablecoins provide beginners a great way to learn how to buy crypto, own crypto in a wallet, and sell crypto before moving on to coins that can create much larger tax consequences.
If we had purchased stablecoins on a CEX and moved them to a DEX before selling, we need to track our costs and report the taxes.