PayPal’s recent announcement about expanding its crypto payment offerings is a significant step toward mainstream adoption of digital assets. By enabling seamless crypto-to-fiat transactions at checkout, PayPal is streamlining the process for both consumers and merchants. However, this innovation raises critical questions for accountants and tax professionals, particularly around tax reporting and compliance.
Additionally, in September 2024, PayPal expanded its crypto services to business accounts, allowing companies to buy, hold, and sell cryptocurrency. This shift enables businesses to engage with digital assets more flexibly, whether for payments or as part of their financial strategy. While this update enhances accessibility, it also brings new tax considerations for companies managing cryptocurrency holdings within PayPal’s ecosystem.
While PayPal’s system converts cryptocurrency into fiat currency at the time of purchase, the conversion does not eliminate tax consequences for the seller. The IRS classifies digital assets as property, meaning that any disposal—whether through sale, exchange, or payment—can trigger capital gains or losses.
PayPal users can acquire crypto through ad hoc or recurring purchases or by receiving transfers from external sources. These assets are held in a custodial PayPal crypto wallet, meaning PayPal manages the private keys. Because PayPal facilitates transactions off-chain, users may have limited visibility into tax lot selection and transaction details. When a user pays a merchant using crypto, PayPal facilitates the transaction by selecting which tax lots are used. If the basis of those tax lots differs from the spot price at the time of transaction, a taxable event occurs.
For businesses utilizing PayPal’s new crypto functionality, additional tax considerations apply. Unlike individuals who primarily use crypto for payments, businesses may hold digital assets as investments, requiring careful tracking of acquisition costs, tax lots, and unrealized gains or losses. Accountants working with business clients must ensure these companies properly document crypto transactions and integrate them into their financial statements.
Joe Woodard recently raised an important question: if the exchange happens instantaneously, does it generate gains or losses? The answer is yes, in most cases. The tax impact is determined by the difference between the asset's cost basis (what the user originally paid for it) and the fair market value at the time of conversion. Even if PayPal automatically selects tax lots, those transactions must be reported, and any resulting gain or loss must be calculated. A tax lot refers to a specific and identifiable asset with an acquisition date/time and a specific cost basis. When a user disposes of crypto, selecting which tax lot is sold determines whether the transaction results in a gain or loss.
For example:
Multiply this across thousands of users and transactions, and the implications for tax professionals become clear. Tracking tax lots and ensuring accurate reporting will be critical, particularly as more businesses begin accepting cryptocurrency through platforms like PayPal.
Data Accessibility: PayPal's crypto infrastructure operates off-chain, meaning users do not have direct access to on-chain transaction records. Accountants will need to rely on PayPal’s reporting tools to track transactions and determine cost basis.
Tax Lot Selection and FIFO/LIFO Concerns: Users may have little control over how PayPal selects tax lots, which can complicate tax planning strategies.
Integration with Existing Tax Software: If PayPal does not provide granular transaction reports that integrate easily with tax software, accountants may face challenges in ensuring accurate reporting.
Education and Compliance: Many crypto users are unaware that spending digital assets is a taxable event. Accountants and tax professionals will need to educate clients on how these transactions impact their tax liabilities.
PayPal’s move toward broader crypto adoption is a landmark moment in digital payments. However, it also reinforces the ongoing need for clear tax guidance and precise record-keeping. As the tax landscape evolves, accounting professionals will play a crucial role in helping clients navigate these new challenges with confidence.
About the Author
Perry Woodin is the Founder of NODE40, a digital asset tracking company used extensively by accounting and auditing firms to generate detailed reports for their clients' digital asset activity on centralized exchanges and decentralized platforms.