Do you have to pay capital gains taxes when converting any cryptocurrency to stablecoins? Are transactions with stablecoins taxable in the US? Many crypto traders believe that trading within the crypto ecosystem without ever converting to FIAT (e.g., USD) means that you don’t have to pay any taxes. But this isn’t the case in the US.
Today, we cover all the taxes involved when converting crypto to stablecoins, how to calculate capital gains taxes for those trades, and include tax simulations.
Is converting crypto to stablecoins taxable?
Selling any crypto to a stablecoin is a taxable event in the US. Any crypto-to-crypto or crypto-to-FIAT trade is a taxable event in the US. Even though you’re not converting into FIAT (e.g., USD), you must account for the capital gains in these trades and make sure you have enough funds to pay taxes on them.
When you convert a cryptocurrency (e.g., Bitcoin) to stablecoins like USDT, the gains are calculated the same as if you were trading Bitcoin for USD.
Your cost basis on the trade was the purchase price you paid when you acquired Bitcoin, and the sales proceeds are the total amount you receive in USDT (measured in USD) when selling your BTC. The difference between the two is the capital gains you’ll have to pay taxes on. The tax rate will depend on your holding period and other factors. Long-term holding offers tax benefits in the US and many other countries.
BTC to USDT taxes
Let’s imagine that Tom bought 1 Bitcoin in December 2020, when 1 Bitcoin was $20K. In November 2021, Bitcoin reached its all-time high at $69,000, and Tom decided to sell his Bitcoin for USDT because he still wants to invest in the future and doesn’t want to send the proceeds to his bank account.
In this scenario, Tom’s cost basis is $20K, and the total sales proceeds are 69K USDT. The capital gains for this trade are $49K ($69K-$20K). Since Tom is selling before holding for more than 12 months, he’ll have to pay a short-term capital gains tax rate instead of a long-term capital gains tax rate. Tom’s capital gains tax rate will range between 10% to 37%, while if he held for more than 12 months, the tax rate would be lower, between 0% to 20%.
Do I have to pay taxes when converting from stablecoins to USD?
Any crypto-to-crypto or crypto-to-FIAT is a taxable event in the US. We know that many stablecoins are pegged to the US dollar, making the conversion from USDT to USD at an almost 1:1 basis. However, this is not necessarily true. There could be very slight differences in the conversion, causing you to have a very small capital gain or loss when converting USDT to USD. This issue happens because the conversion rate of 1 USD may be 1.01 USDT or 0.99 USDT, causing discrepancies and small gains/losses.
Since you must report any crypto-to-crypto or crypto-to-FIAT trade, you’ll have to calculate the gain/loss on these trades and report it on your tax return.
These capital gains are very difficult to calculate without the help of crypto tax software. We encourage you to check how CoinTracking can import all these trades and automatically calculate your capital gains from stablecoins trades.
Do I have to pay taxes when converting between stablecoins?
A trade between stablecoins is a taxable event in the US. If you convert USDT to DAI or another stablecoin, you have to calculate the gain/loss on the trade, even if it is very small, and report on your tax return.
The conversion between stablecoin is not exactly on a 1:1 basis. On top of that, according to the IRS, any crypto-to-crypto transaction is a taxable event. Following those guidelines, a stablecoin is still a cryptocurrency, making any stablecoin-to-stablecoin trade taxable and reportable in the US.
For example, the conversion rate between USDT and DAI could be that 1 USDT is 0.9995 DAI. Even though this is an almost indistinguishable difference, it will still cause a very small gain/loss on that trade. Even if the conversion had a 1:1 basis, you would still have to report the trade and a $0 gain because any crypto trade is taxable and reportable in the US.
How do I report stablecoins trades on my taxes?
You need to report all your crypto trades, including your stablecoin-to-stablecoin trades, because those are taxable events in the US. As we’ve seen, even if you have a marginal gain on those trades, you still need to report them on Form 8949 and Schedule D of your Form 1040.
Find out all of your crypto tax reporting requirements in our guide.
Learn how you can import your stablecoins trades into CoinTracking:
How do you do your stablecoins taxes?
Import your crypto-to-stablecoin trades into a crypto tax software.
Automatic gain/loss calculation, even in stablecoin-to-stablecoin trades, based on the approved accounting methods.
Generate ready-to-go tax reports.
The best crypto tax software: CoinTracking
CoinTracking covers all your crypto tax needs. Our crypto tax software makes it easy to import your trades, get your gains calculated, and generate the appropriate tax reports.
After importing all your crypto trades, CoinTracking automatically calculates your crypto capital gains and losses, while you can choose between 12 accounting methods (e.g., FIFO, HIFO, HMRC, ACB), depending on which country you are in. Moreover, CoinTracking can generate ready-to-go tax reports for 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 reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
Clarify all your crypto tax questions:
DeFi Taxes: The Complete Guide.
How to save taxes with a Bitcoin IRA.
Do you pay taxes for receiving Bitcoin tips?
Uniswap Taxes Guide
How to calculate taxes with Bitcoin dollar-cost averaging?
FIFO for crypto taxes? Implications of accounting methods.
NFT Taxes: The Complete Guide.
2021’s NFT guide (with taxes).
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
Do you pay taxes on Bitcoin debit cards purchases?
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
How to reduce your crypto taxes?
Crypto tax loss harvesting: Here’s what you need to know
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.