How are Stablecoins Taxed?

Why do people have stablecoins?

Stablecoins have consistently shown themselves to be a prominent part of the crypto ecosystem. In 2021, the estimated transaction volume for stablecoins reached an exceptional $1.7 trillion. But this leaves many people confused, since the vast majority of consumers see crypto as an investment vehicle, not something to create into a slightly more complicated dollar bill. Are stablecoins really worth the exchange fees?



The truth is that, yes, most people do see crypto as an investment. Those who buy Bitcoin are likely not planning to use it beyond acting as a staple of their crypto portfolio. The furthest the average investor will go is to use Ethereum to purchase another investment, like NFTs, which come with their own NFT tax headaches. Generally, investors don’t want to spend and incur capital gains on their long-term investment.

Stablecoins address this problem by acting as a cryptocurrency that investors can use on a daily basis. Because these coins are tied to a stable fiat currency (relative to the highly volatile crypto market), they are not subject to the stressors of constant value changes. Stablecoins can track fiat currencies, gold, oil, and more.

But wait… don’t these commodities vary in value?

Yes, good catch! The value of these commodities do change, but they are usually more stable and move at a slower, more gradual pace. However, considering that $1 in 1970 is worth $7.45 today in 2022, this is an important question to ask.

It is because of this very discrepancy that stablecoins are actually taxed the same as regular cryptocurrency, despite being meant for regular transactions. The IRS sees all cryptocurrency as property, and it applies capital gains tax laws onto each of them.

Because of this, savvy investors will work with a tax professional to use their cryptocurrency holdings to their advantage. We’ve made articles on how to lower your crypto taxes, how to create a backdoor crypto Roth IRA, and what you need to do to avoid crypto audits.

But beyond that, speaking directly to a tax professional about your unique situation is the best way to maximize your benefit with these various strategies. This applies whether you’re using stablecoins or focusing on your main portfolio! Set up a free one hour consultation with a YokeTax professional as soon as you can.

Stablecoin activity is taxed differently

Something we would like to touch on is how stablecoins are taxed depending on the situation. After all, investors will use stablecoins for a variety of purposes, and this can affect the degree to which they are taxed on April 15.

Buying a product or service with a stablecoin

When you buy goods and services with a stablecoin, you are within the legal bounds of a taxable event. The tax levied against you is capital gains tax, which we go over in more detail here. The long and short of it is that your capital gains tax will be based on how your stablecoins have fluctuated from the point that you purchased them.

Since the USDC is pegged to the USD, and the USD is always $1, your capital gain will be $0. This is something which you must report in your tax return, even if it seems silly. And yes, the IRS knows that you own crypto.

Trading a stablecoin for another cryptocurrency

Now, what happens if you trade your stablecoin for another cryptocurrency? Well, the same applies. If you bought Paxos Gold (PAXG)- a gold stablecoin backed by real gold reserves held by Paxos, a for-profit company based in New York- with your USDC, then your USDC would still be subject to that $0 capital gains tax. That must be reported to the IRS.

Trading another cryptocurrency for stablecoin

The same applies! If you owned $500 worth of PAXG and decided to trade it to USDC after it hit $1,200, then you would be subject to a $700 capital gains tax (1,200 - 500 = 700). 

Getting a stablecoin as a payment

The widespread adoption of crypto has led to a boom in innovation, even in hiring practices. Specifically in the tech industry, there are a growing amount of companies willing to pay employees with cryptocurrencies- usually in the form of stablecoins.

In these situations, the stablecoin is not an investment but income. As such, it must be reported as ordinary income. The tax you pay will vary based on your gross earnings, filing status, and the state in which you reside.

Speak with a Yoke tax professional in a free one hour consultation to learn how you can minimize your tax bill- be it with USD or USDC!

Transferring stablecoin between wallets

This depends on the situation. Is it a wallet that you own? Then no, you will not be triggering a taxable event because the stablecoin is still your property. It’s like moving a bike from your backyard to your garage: it’s still yours, but you’ve just chosen a different location to store it in.

Now, if the wallet is someone else’s then you have triggered a taxable event. The stablecoin is no longer your property, and thus you have sold it. Unless, of course, it was a gift. That’s a whole other can of worms.

No matter how you choose to lower crypto taxes on your portfolio, it is best to connect with a tax professional to make sure that everything is done correctly. Let Yoke Tax handle the numbers while you reap the benefits.