Tax reporting can be daunting, but PayPal is on a mission to make reporting cryptocurrency taxes as seamless as possible.
 
The information provided by PayPal is not intended to be and should not be construed as tax advice. You should consult your tax advisor regarding which cost basis method is appropriate for your specific situation.

Am I required to file taxes on my crypto?
Yes, the IRS now asks all taxpayers if they are engaged in virtual currency activity on the front page of their tax return.

How is cryptocurrency taxed?
In the U.S. cryptocurrency is taxed as property, which is a capital asset. Similar to more traditional stocks and equities, every taxable disposition will have a resulting gain or loss and must be reported on an IRS 8949 tax form.
 
Taxpayers must attest to whether they transacted in virtual currency starting in 2020 forward.
Starting in 2020, the IRS added a question to the personal federal income tax form (1040) that asks taxpayers, “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

If a taxpayer answers “Yes” to this newly included question on their income tax filing, then the IRS would look to see if the taxpayer filed a Form 8949 to report capital gain/loss for virtual currency transactions.
 
If the taxpayer fails to report their cryptocurrency taxes, then they may be subject to fines as penalties. Fortunately, similar to the sale of stock, if you realized net capital losses for the year then 26 U.S. Code § 1211 of the Internal Revenue Code provides relief in the form of a deduction for losses on capital assets.

If you hold an asset for over a year, then you may qualify for tax-advantaged long-term capital gain rates.
According to U.S. tax law, there are two types of capital gains that can be calculated when you sell a given asset — short-term and long-term capital gains.

Short-term capital gains
If you hold a particular cryptocurrency for one year or less, then upon disposing of the asset the gain will be taxed pursuant to the short-term capital gains rates. Short-term capital gains are taxed at your ordinary income tax rate.
 
Long-term capital gains
If you held a particular cryptocurrency for more than one year, then you are eligible for tax-preferred long-term capital gains. The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status.
 
How to report losses on crypto trades
Crypto traders have the opportunity to claim capital losses during the year. Fortunately, the IRS allows taxpayers to claim deductions on their cryptocurrency capital losses (26 U.S. Code §1211).

Why crypto traders should report both gains and losses
Speaking to the overall importance of reporting both gains and losses on crypto trades, The IRS has reiterated that “failing to report your losses and gains could have big consequences.”
 
Reporting your losses on crypto transactions has the added benefit of potential tax deductions. Taxpayers can deduct $3,000 in capital losses a year ($1,500 if you are married and filing a separate tax return). Claiming your cryptocurrency capital losses can result in a higher refund on your tax return via this deduction.
 
Also, important to note, that if a taxpayer has more than $3,000 in net capital losses in a taxable year, then the excess losses can be carried forward into future tax years. A taxpayer may then use the losses to offset capital gains in a future tax year or can claim the capital loss deduction again.
 
Cryptocurrency fees
Cryptocurrency traders can save money on their transaction fees by adding the cost of fees into their cost basis and deducting fees from proceeds when reporting transactions. Accordingly, accounting for fees is always beneficial, as it results in a smaller gain or a higher loss.
 
Example of fees when buying crypto
If a taxpayer buys 1 Bitcoin when 1 BTC = $10,000, and pays $50 in fees, then the IRS allows you to report a cost basis of $950. Adjusting for fees allows a lesser realized taxable gain.
 
Example of fees when selling crypto
This same example applies inversely for fees when selling cryptocurrency. If the taxpayer purchased BTC at $10,000, sells it for $11,000 and pays $50 in fees, then the IRS allows the taxpayer to deduct the $50 from the proceeds amount. In this example, the taxpayer would report proceeds of $950 from selling the crypto.
 
How to file your crypto taxes
PayPal will provide a Transaction Summary, this summary is a .CSV file that will list the date acquired or sold, the quantity of the transaction, fee per transaction, total value, and transaction ID If you have crypto assets outside of PayPal’s platform and subsequently disposed of the assets, then PayPal will not have visibility into your information, and it is, therefore, your responsibility to track and report such information.