Do you have to pay capital gains taxes when converting any cryptocurrency to stablecoins? Are transactions with stablecoins taxable in the US? Many cryptocurrency traders believe that trading within the crypto ecosystem without switching to FIAT (eg US dollars) means that you don’t have to pay any taxes. But this is not the case in the United States.
Today, we cover all the taxes involved when converting cryptocurrencies into stablecoins, how to calculate capital gains taxes for those trades, and including tax simulations.
Is converting cryptocurrency into stablecoins taxable?
The sale of any cryptocurrency into a stablecoin is a taxable event in the United States. Any trade from cryptocurrency to cryptocurrency or cryptocurrency to FIAT is a taxable event in the United States. Even though you’re not converting to FIAT (eg, US dollars), you should calculate the capital gains on these trades and make sure you have enough money to pay taxes on them.
When you convert a cryptocurrency (for example, Bitcoin) into stable currencies such as USDT, the gains are calculated as if you were trading Bitcoin against the US dollar.
The cost basis of the trade was the purchase price you paid when you acquired Bitcoin, and the sales proceeds are the total amount you receive in USD (measured in USD) when you sell your BTC. The difference between the two is the capital gains that you will have to pay taxes on. The tax rate depends on your holding period and other factors. Long-term tenure provides tax advantages in the United States and many other countries.
BTC Taxes to USDT
Let’s imagine that Tom bought 1 bitcoin in December 2020, when the price of 1 bitcoin was $20,000. In November 2021 Bitcoin reached an all-time high of $69,000 and Tom decided to sell his Bitcoin for USDT because he still wanted to invest in the future and didn’t want the proceeds to be sent to his bank account.
In this scenario, Tom’s cost basis is $20K, and total sales revenue is $69K. The capital gain for this trade is $49,000 ($69,000 – $20,000). Since Tom sells before holding it for more than 12 months, he will have to pay the short-term capital gains tax rate instead of the long-term capital gains tax rate. Tom’s capital gains tax rate will be between 10% to 37%, while if he keeps it for more than 12 months, the tax rate will be lower, between 0% to 20%.
Do I have to pay taxes when converting from stablecoins to US dollars?
Any cryptocurrency to cryptocurrency or cryptocurrency to fiat is a taxable event in the United States. We know that many stablecoins are pegged to the US dollar, which makes the conversion from USDT to USD almost 1:1. However, this is not necessarily true. There may be very slight variations in the conversion, resulting in a very small capital gain or loss when converting USDT to USD. This issue occurs because the conversion rate of 1 USD may be 1.01 USD or 0.99 USD, which causes small discrepancies and gains/losses.
Since you must report any crypto-to-crypto trade or crypto-to-fiat trade, you will have to calculate the gain/loss on these trades and report them on your tax return.
It is very difficult to calculate these capital gains without the help of crypto tax software. We encourage you to check out how CoinTracking imports all these trades and automatically calculates your capital gains from stablecoin trades.
Do I have to pay taxes when converting between stablecoins?
Trading between stablecoins is a taxable event in the United States. If you convert USDT to DAI or another stable currency, you must calculate the profit/loss on the trade, even if it is very small, and report it on your tax return.
Transferring between stablecoins is not exactly on a 1:1 basis. Moreover, according to the IRS, any crypto-to-crypto transaction is a taxable event. By following these guidelines, a stablecoin is still a cryptocurrency, which makes trading any stablecoin into a stablecoin taxable and reported in the US.
For example, the conversion rate between USDT and DAI can be that 1 USDT is 0.9995 DAI. Although this is an almost indistinguishable difference, it still causes very small gain/loss on that trade. Even if the transfer has a 1:1 basis, you still have to report the transaction and the $0 winnings because any crypto trade is taxable and can be reported in the US.
Subscribe to CoinTracking today!
How do I report stablecoin trades to my taxes?
You need to report all your crypto trades, including your stable trades, to stablecoin, as these are taxable events in the United States. As we’ve seen, even if you have marginal gains on those trades, you should still report them on Form 8949 and Schedule D of your Form 1040.
Find out all the crypto tax reporting requirements in our guide.
Learn how to import your stable trades into CoinTracking:
How do you tax your stablecoins?
Import cryptocurrency trades into stablecoins in crypto tax software.
Automatic profit/loss calculation, even in stablecoin trades to stablecoin, based on approved accounting methods.
Generate ready-to-use tax reports.
Best Crypto Tax Software: CoinTracking
CoinTracking covers all your crypto tax needs. Our crypto tax software makes it easy to import your trades, calculate your winnings, and generate appropriate tax reports.
CoinTracking supports over 100 exchanges, including DeFi, NFTs, Binance Smart Chain, MATIC, and more.
After importing all your crypto trades, CoinTracking automatically calculates crypto capital gains and losses, while you can choose from 12 accounting methods (eg, FIFO, HIFO, HMRC, ACB), depending on which country you are in. Furthermore, CoinTracking can generate tax reports that are ready for use in your country.
Submit your crypto taxes 100% hassle-free with our full service in the US
CoinTracking also offers a full service for US traders. A crypto settlement tax expert from Polygon Advisory Group, a leading US tax firm, will review your CoinTracking account, help fix any errors, and ensure your crypto tax reports are submitted flawlessly.
Clarify all crypto tax questions:
DeFi Taxes: The Complete Guide.
How to save taxes with a Bitcoin IRA.
Do you pay taxes to receive bitcoin tips?
Uniswap . Tax Guide
Is cipher wrap taxable?
How do you calculate taxes at the average dollar cost of bitcoin?
Do you pay taxes on stolen, hacked or lost cryptocurrency?
FIFO for Crypto Taxes? The implications of accounting methods.
NFT Taxes: The Complete Guide.
NFT Guide 2021 (with taxes).
Is bitcoin taxable? The Ultimate Guide to Taxes for 2021.
Do You Pay Taxes on Bitcoin Debit Card Purchases?
Is bitcoin taxable? The Ultimate Guide to Taxes for 2021.
The most tax-friendly countries for cryptocurrency.
How do you reduce your crypto taxes?
Crypto tax loss harvest: Here’s what you need to know
Disclaimer: All information provided above is for informational purposes only and should not be considered professional, legal or tax advice. You should do your own research or consult with a professional financial advisor when investing.