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Stablecoin taxes

Lesson in Course: Crypto (advanced, 2min)

Stablecoin prices hardly move. Are they taxed?

Eureka!

What it's about: Tax treatment for stablecoins.

Why it's important: We may receive unexpected tax forms for fiat-backed stablecoins.

Key takeaway: Taxes for fiat-backed stablecoins are usually minimal while taxes for the commodity or crypto-backed stablecoins can be much more.

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?

Isn't a dollar worth a dollar? 

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.

Stablecoin tracking 

For example, let's say we bought 1,000 USDC at $1.00 each; we have a cost basis of $1000 for USDC. 

Then we decide to sell our USDC to buy another coin, like Bitcoin. 

When we sold the 1,000 USDC, let's say the value of 1 USDC was $1.02. 

This trade would result in $2 of capital gains under current tax rules: 1,000 x ($1.02-$1.00)

Fiat-backed stablecoins should rarely deviate enough to cause significant tax gains or losses.

Other stablecoins

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.

3-month spot price of gold

We can see that there is a net gain if we had bought gold in early August.

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.

PAXG 3-month price

As we can see PAXG chart looks identical to the gold spot price chart above.

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. 

Waiting longer to sell results in lower long-term gains tax rates

Swap out the gold for another crypto and the taxes owed can be even more.

Actionable ideas

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.