Stablecoins have become increasingly popular in recent years as a way to bridge the gap between the volatility of cryptocurrencies and the stability of fiat currencies. But with their growing use comes questions around how they are treated for tax purposes. Are stablecoins subject to capital gains tax like other cryptocurrencies? Or are they treated differently given their stable value pegged to fiat currency? In this article, we’ll take a comprehensive look at how stablecoins are currently taxed and what you need to know if you own or transact with stablecoins.
What are stablecoins?
Stablecoins are cryptocurrencies that have their value pegged to an external stable asset like the U.S. dollar or gold. This pegged value helps minimize the volatility typically seen with cryptocurrencies like Bitcoin and Ethereum. Some of the most popular stablecoins include Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
Stablecoins achieve their price stability through various mechanisms:
- Fiat collateralized – Each coin is backed by an equivalent amount of fiat currency reserves.
- Crypto collateralized – Coins are backed by reserves of other cryptocurrencies.
- Algorithmic – Price stability is maintained through an algorithm and smart contracts.
The pegged value allows stablecoins to function similarly to fiat currencies for payments, trading, and as a stable store of value. This bridges the gap between the advantages of cryptocurrencies and the stability of everyday cash.
How are cryptocurrencies taxed?
Before looking specifically at stablecoins, it’s important to understand how cryptocurrencies like Bitcoin and Ethereum are treated for tax purposes. In general, cryptocurrencies are treated as property by the IRS rather than as currencies. This means:
- Trading cryptocurrencies triggers capital gains/losses – If you sell cryptocurrency at a profit you will owe capital gains tax. If you sell at a loss you can claim a tax deduction.
- Mining coins is taxable income – Mining cryptocurrencies constitutes taxable income equal to the fair market value of the coins when mined.
- Using crypto to pay for goods/services may be a taxable event – If you use cryptocurrency to pay for an item or service, you have engaged in a sale or exchange of that crypto, triggering capital gains.
Understanding these general principles can help provide context around how stablecoins fit into the cryptocurrency tax landscape.
Are stablecoins taxed as capital assets?
Stablecoins are currently treated as property for federal tax purposes just like other cryptocurrencies such as Bitcoin and Ethereum. This means that capital gains taxes can apply when you sell, trade, or otherwise dispose of stablecoins at a profit.
For example, if you purchased $500 worth of a stablecoin and later traded that for $600 worth of another cryptocurrency when the stablecoin’s dollar value remained $500, you would have a $100 capital gain. That $100 gain would be subject to capital gains tax rates (either short-term or long-term depending on how long you held the asset).
The same principles apply if selling stablecoins for cash. If you sell stablecoins for more fiat currency than you paid to acquire them, the gain is taxable. Losses can be deducted just like with other capital assets.
One exception is if you purchase goods or services directly with a stablecoin. In that case, capital gains taxes may still apply to any gains made on the stablecoins prior to the transaction.
Long-term vs. short-term capital gains
The rate at which crypto capital gains are taxed depends on whether they are classified as long-term or short-term gains.
Short-term gains apply to assets held for 1 year or less. These gains are taxed at your ordinary income tax rate which can climb to 37% based on your tax bracket.
Long-term gains on assets held over 1 year are generally taxed at preferential rates of 0%, 15% or 20% depending on income level and filing status.
This holds true for stablecoins as well. If you hold a stablecoin longer than 1 year before selling or trading it, the gain would qualify for long-term capital gains treatment.
How do airdrops and forks impact taxes?
Many stablecoin projects issue free tokens through airdrops or forks to drive adoption. Receiving new cryptocurrency from an airdrop or fork is treated as taxable income by the IRS.
For example, if you receive $100 worth of a stablecoin token through an airdrop when the dollar-pegged value is $100, you have $100 of taxable income to report even if you haven’t sold the tokens.
This is because you have taken constructive receipt and control of the new stablecoin asset. The fair market value at the time of receipt becomes your cost basis in the new stablecoins.
Can you defer taxes with a 1031 exchange?
Section 1031 exchanges allow you to defer capital gains taxes when selling certain types of property and reinvesting in similar property. For example, investors who sell real estate investment property can defer taxes by buying another rental property.
Unfortunately, a 1031 exchange does not apply to cryptocurrency sales, including stablecoin transactions. The IRS defines property eligible for 1031 exchanges as real property and certain tangible personal property. Intangible property like cryptocurrencies do not qualify.
As a result, you cannot defer capital gains taxes when selling stablecoins by reinvesting in other cryptocurrencies. Taxes are due in the year of the taxable sale.
How does wash sale rule apply?
The wash sale rule prevents taxpayers from claiming a loss on the sale of a security if a substantially identical security is repurchased within 30 days before or after the loss sale. This rule was designed to prevent abusive loss harvesting.
The IRS has not definitively stated whether the wash sale rule applies to cryptocurrency transactions, including stablecoins. However, many tax experts believe it can be applied under the theory that cryptocurrencies qualify as securities.
If the wash sale rule does apply, it would mean you cannot sell a stablecoin at a loss and then buy back the same stablecoin within 30 days before or after the sale date. This prevents claiming the capital loss on your taxes while still holding the position.
It is recommended to consult a tax professional familiar with cryptocurrency tax rules when assessing how wash sale implications impact your stablecoin transactions.
Are stablecoin loans and interest taxable?
Taking out a cryptocurrency loan using stablecoins as collateral may have tax consequences. In some cases, the IRS treats collateralized crypto loans as a sale of the cryptocurrency.
For example, if you take out a $10,000 cash loan using $15,000 worth of stablecoins as collateral, the IRS may treat this as if you sold $10,000 of the stablecoins. That could trigger capital gains on the stablecoins if they had unrealized appreciation.
In addition, any interest earned on stablecoins from lending or staking is considered taxable income. For instance, earning 5% APY staking rewards on your stablecoin holdings would be taxed as ordinary investment income.
Properly reporting stablecoin loans and interest on your taxes is important. Failure to report income from crypto lending activity could lead to penalties.
Do you have to pay taxes when converting between stablecoins?
Swapping one stablecoin for another can still be a taxable event if it results in a capital gain, even though their values are pegged to be stable.
For example, say you purchased 100 USDT for $100 and later swapped it for 110 USDC when both were still worth $1 USD. That $10 gain is taxable since you increased your stablecoin holdings from a presumed purchase and subsequent exchange.
In practice, minor fluctuations that occur when trading between two stablecoins that track the same currency are unlikely to create any meaningful gain. But significant differences in stablecoin valuations could result in recognizable capital gains.
It is advisable to keep records documenting both the purchase price and the market value of stablecoins at the time of any trades between stable assets.
How should stablecoin payments be reported?
Using stablecoins as payment for goods and services can have tax implications. As with other cryptocurrencies, spending stablecoins is treated as a sale of property by the IRS.
You need to calculate your capital gain or loss based on the fair market value of the stablecoins at the time of the transaction versus your adjusted cost basis in those coins.
For example, if you bought $100 worth of a stablecoin initially and later spent $150 of that stablecoin to pay for a service when it was still valued at $100, you would have a $50 capital gain. That $50 gain is taxable income from the sale, even though a fiat currency was not exchanged.
Proper recordkeeping is key to accurately reporting stablecoin payments and associated gains/losses. Some tax software providers are adding stablecoin payment tracking features to help automate gain and loss calculations.
Do you have to pay taxes when buying goods with stablecoins?
Yes, using stablecoins to directly purchase goods and services can still trigger capital gains taxes.
When you use cryptocurrency as payment, the IRS treats it as a sale of property. You are essentially selling your stablecoins in exchange for the goods or services you are purchasing.
This means you need to calculate and report any capital gains realized when spending stablecoins based on the fair market value at the time of the transaction.
For example, if you paid 0.5 ETH for a stablecoin when ETH was worth $1,000 per coin, your cost basis in the stablecoin would be $500. If you later spent the stablecoin to buy goods valued at $600 when the stablecoin was still worth $500, you would have a $100 capital gain.
Keeping detailed records of stablecoin purchases, transaction dates, fair market values, and associated costs is important for accurately calculating gains and losses.
How should stablecoin mining be taxed?
Although less common than with other cryptocurrencies, some stablecoin projects involve mining where coins are awarded for validating transactions.
The IRS treats mining of cryptocurrencies as taxable income equal to the fair market value of the coins when mined. This same principle applies to stablecoins received as mining rewards.
If you mine $100 worth of a stablecoin token when the dollar-pegged value is also $100, you have $100 of taxable income to report. The $100 value upon mining would become your cost basis in the stablecoin if you later sold or spent those coins.
Proper valuation of stablecoins when mined is important, as the dollar-pegged value determines the amount of taxable income. Detailed records should be kept of all stablecoins received from mining activity.
Can you avoid taxes by using offshore stablecoins?
There are some foreign-based stablecoins whose founders tout their offshore status as a way to avoid taxes. However, simply using an overseas stablecoin does not exempt you from crypto tax obligations.
The IRS makes clear that U.S. citizens, residents, and certain nonresidents owe taxes on their worldwide income regardless of where an asset is located. Further, anti-money laundering regulations require U.S. citizens to report foreign assets.
Attempting to conceal assets in offshore stablecoins or entities may constitute tax evasion or money laundering. Failure to report offshore stablecoin holdings can also lead to stiff penalties beyond just owing back taxes.
Those dealing in digital assets should comply with applicable tax laws, regardless of where any particular stablecoin is located or incorporated. Ignorance of stablecoin tax rules is generally not an acceptable excuse in an audit or investigation.
Conclusion
Stablecoins present unique tax considerations given their goal of minimal price volatility. But despite their name, stablecoins are currently treated just like other cryptocurrencies for federal tax purposes in the United States.
Buying, selling, exchanging, or mining stablecoins can trigger capital gains taxes. Earning interest on stablecoins is considered taxable income. Even spending stablecoins on goods and services constitutes a taxable sale event.
Keeping detailed records is essential to track cost basis, fair market value, holding periods, received airdrops, and coin acquisitions. Tax rules in this area remain complex. Working with a knowledgeable tax professional can help you be sure your stablecoin activities are reported properly and optimize handling of any gains and losses.
With stablecoins becoming a bigger part of digital asset markets, it is likely only a matter of time until clear tax guidelines are issued specifically addressing common stablecoin uses. But for now, it is safest to treat stablecoin transactions consistent with existing cryptocurrency tax principles. Proper reporting can help avoid headaches down the road if the IRS audits your return and stablecoin activity.