Payment company PayPal recently announced customers can buy, sell and hold Bitcoin as well as other cryptocurrencies through the company’s online wallets. PayPal, which has secured the first “conditional” cryptocurrency license from the New York State Department of Financial Services (“NYDFS”), initially will allow purchases of Bitcoin and other cryptocurrencies including Ethereum, Bitcoin Cash, and Litecoin. PayPal President and Chief Executive Dan Schulman said they hope “the service will encourage global use of virtual coins and prepare its network for new digital currencies that may be developed by central banks and corporations.”
While PayPal’s announcement seemingly opens the door for continued adoption of cryptocurrencies across the world, there is skepticism surrounding some of the company’s practices. For one, PayPal’s policy disallows users from transferring cryptocurrencies in and out of its platform. The company states “Currently, you can only hold the cryptocurrencies that you buy on PayPal in your account. Additionally, the crypto in your account cannot be transferred to other accounts on or off PayPal … You own the crypto you buy on PayPal but will not be provided with a private key.” In the absence of allowing withdrawals to self-custody or transfers to other accounts, there are questions surrounding PayPal’s entrance into the cryptocurrency space. Bitcoin is built on the pillars of decentralization and self-custody. PayPal removing these pillars as part of its offering of Bitcoin and other cryptocurrencies seemingly creates a mirage for users believing they truly own their coins. However, this may be a preliminary step, with a longer term goal of allowing transfers to other third party wallets.
In addition, there are tax implications worth noting. Cryptocurrencies like Bitcoin are treated as property per the IRS. Every time a person sells, exchanges or disposes of a cryptocurrency, there is a taxable event. PayPal stated that users “will be able to instantly convert their selected cryptocurrency balance to fiat currency, with certainty of value and no incremental fees.” As such, this could mean every time PayPal converts cryptocurrency to fiat on behalf of a customer, a taxable obligation is triggered for the customer. Also of note concerning PayPal’s withdraw restriction, if a user wants to close the PayPal cryptocurrency account, they will have to sell the cryptocurrency in the account triggering another taxable event. The following example illustrates a possible taxable event:
For example, assume Joe wants to buy a piece of furniture listed for $10,000 by a PayPal merchant. Joe doesn’t have US dollars to make the purchase, so he uses 1 Bitcoin (BTC) he owns. Joe purchased this 1 BTC for $4,000 a few years ago and now it’s worth $12,000. When Joe initiates the transaction through PayPal, PayPal converts this 1 BTC into $12,000 USD and transfers the funds to the merchant. At the time of the conversion, Joe would face a taxable event and have to pay taxes on $8,000 ($12,000 – $4,000) of long-term capital gains.
Overall, PayPal’s entrance into the cryptocurrency space will undoubtedly expose many across the world to Bitcoin and other cryptocurrencies for the first time while the ramifications remain to be seen.