PayPal Inc. (PYPL, Financial) embraced the cryptocurrency market after rolling out trading services in the U.S last week. The online payments giant's recent activities have had a major impact on the cr.yptocurrency market, with the price of bitcoin surging closer to historical highs.
However, investors will also be taking note of the potential implications this could have on various aspects of investing. The company's stock has gained more than 5% over the last five days, which could be partly attributed to the cryptocurrency news.
The implication on taxes
PayPal has placed a ceiling of $20,000 for the total weekly crypto payments per account holder. Initially, it was announced that the payments company would allow a maximum of $10,000 worth of crypto transactions per week.
The company first introduced a crypto trading feature in October, which sparked mixed reactions in the market relating to taxes. According to the press release, PayPal users will be allowed to instantly convert cryptocurrencies into fiat currency. They will also be allowed to shop using crypto, but what some may not know is that PayPal will first convert the cryptocurrency used for payment into fiat.
In general, the whole process of converting cryptocurrencies to fiat could result in capital gains. The Internal Revenue Service categorizes cryptocurrencies like bitcoin as capital assets rather than currency. This means they qualify for capital gains taxes.
PayPal could serve as the avenue that the IRS has been searching for to help implement taxation on cryptocurrency payments.
With its massive global user base of over 350 million accounts, including 26 million merchant accounts, the online payments company could help bring some legitimacy to crypto payments by helping to smooth out the taxation process.
A slight twist for stablecoins
The impact could be different when it comes to stablecoins because they are exchanged at a stable rate of $1.00 per coin, which means there are no capital gains. However, they could qualify as dividends. Stablecoin investors earn a yield from their investments, which is mainly derived from the continued use of the service they have invested in.
For instance, if PayPal's merchant account holders use Tether for business transactions, the merchants are charged a commission, which is partly credited to the Tether coin holders as an earnings yield.
This is possible because of the rise of DeFi projects like BXTB which facilitate the collateralization of stablecoins, thereby allowing investors to earn a yield on their investments. PayPal could play a huge role in growing this market by linking merchant account holders across the globe. Businesses appear to prefer stablecoins ahead of cryptocurrencies because of the relatively low volatility they offer.
Does PayPal benefit?
PayPal appears to have noticed the exciting potential of cryptocurrencies and has started to buy huge amounts of bitcoin. According to reports, the online wallet company bought 70% of all bitcoins mined in October.
The reason behind this could simply be that PayPal wants to make it easier for its users to start buying crypto— if it chooses to sell to them. The other reason could be that it could be investing in bitcoin long term.
Whichever the case, PayPal will certainly gain from the bitcoin it bought if the price of the pioneer cryptocurrency continues to rise.
Conclusion
In summary, PayPal's entry into the cryptocurrency market is one of the biggest boosts that the industry needed. While the likes of Facebook Inc. (FB, Financial) and JPMorgan Chase (JPM, Financial) already launched their cryptocurrency projects, they do not have the type of global influence PayPal has through its digital payments platform.
However, cryptocurrency traders should watch out for the potential implications this move has in terms of taxation to avoid any confusion. PayPal, on the other hand, could stand to benefit from an inflow of new account holders as it rivals other crypto wallet companies.
Disclosure: No position in the stocks mentioned.
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