Will PayPal's crypto offer turn into a tax nightmare?

The news that payments company PayPal will support cryptocurrencies has given the industry a major boost - but there are tax implications that are little understood by crypto noobs.

They could face a tax nightmare arising from the volatile nature of crypto assets and the tax reporting requirements.

Selling crypto within PayPal triggers a taxable event as does using the crypto to buy anything, as PayPal converts the funds into fiat first before paying the merchant.

Because Bitcoin and crypto assets are volatile, users will be liable for significant capital gains tax on the amount the asset has gained between the time it was acquired and spent.

That's not a problem as long as users keep records and put tax aside - but most new users are unlikely to understand the tax implications and requirements.

"You must report this gain on your tax return, and depending on what tax bracket you fall under, you pay a certain percentage of tax on the gain".

"It is your responsibility to determine what taxes, if any, apply to transactions you make using your Cryptocurrencies Hub. You can access your transaction history and account statements through your PayPal account for purposes of determining any required tax filings or payments".

Initially, PayPal will only offer its new crypto payments services to U.S. account holders, but it could be rolled out globally next year.

The U.K. also has similar capital gains tax implications and HMRC began actively chasing crypto traders in late 2019.

Australian cryptocurrency traders and investors are also subject to capital gains taxes and even income tax if they earn digital assets.