Paypal has adopted crypto-currencies in their payment services. Besides goods also services and work can be paid via Paypal. While the transfer of fiat currencies is regulated and observed by the government, “crypto” is not, at least not yet fully.
Can we now save on taxes including taxes on trading gains or income tax?
Can we now transfer value or “purchasing power”, if you will, without legal obstacles?
Can we regain some freedom in a world that’s steered towards the end of cash?
Seen from a visionary’s perspective:
When 12 years ago someone would have said, whatever spending on leisure and goods is better be ceased, it’s Bitcoins that should be acquired, as many as possible, this person hardly would have been considered smart. The girl made millions. If another visionary, only until a few months ago, would have said, “Bitcoin goes matrix” explaining that “crypto”, spearheaded by Bitcoin, is going to enter the world of old cash and finance and will be a normal means of payment soon in which or with which investments can be made, this visionary would have been considered too far in the his “soon”.
Soon is now, and Paypal has embarked on crypto-currencies.
This means, a large step towards being a reliable means of payment has been made. It can be used to purchase goods and services or transfer purchasing power by means of a mouse click. This got announced within days after the European Union’s dash towards regulation of the crypto-currency market.
Paypal’s innovation might interfere with these plans, at least it could but in fact doesn’t.
Digging into Paypal’s whereabouts, philosophy and plans we find the company’s rise has begun in the year 2000, when two companies fused together one of which was run by Peter Thiel, a German investor, and the second of which was Elon Musk secondly founded business. Speaking of visionaries, the team around these two can be held responsible for founding or funding Clarium Capital, Facebook, Instagram, LinkedIn, Square, Yelp and Youtube. Going by the name “PayPal” the world has been taken by storm as PP went from payment per mail services to payment via the internet. Back then, in 2000, PayPal’s striking feature was besides speed and ease of use its remarkable undercut in fees compared to what was normal with international payments back then. It thus is thanks to PayPal that the so-called SEPA Agreement (“Single Euro Payments Area”) got signed by 36 nations that money transfer was made cheaper to better the competitiveness of the old bank-based system.
Now, besides fees there’s another unique selling point for PayPal: Cryptocurrency, also referred to as “crypto” herein. Payment can be made from a wallet listed as a means of payment with Paypal. Fiat money transfer is regulated internationally, so it is not without administrative harbingers when sending sums larger than EUR 12,500; a notification is automatically made to the central banks. What’s under the radar mostly is, that since a few years, whenever an amount of 10k or larger is made to a bank account, banks are obliged to inform the sender’s tax office which in turn might check-out the sender’s account. This is where the crypto and the electronic wallet come in.
Source: Payment methods globally, 2019 and 2023, source: www.statista.de
Wallets can be hot or cold. The former means, it’s electronically stored on some server, this information about your crypto assets, “cold” means, it’s stored on a memory stick only. Thus, this information about financial possessions cannot be hijacked, obtained or tokens get “magically” withdrawn. As what’s normal with an advantage, it comes with a flip side: stick lost equals crypto assets gone. Aside from physical loss, credentials can get lost. As with everything digital: keep passwords safe.
PayPal together with electronic payment services in general do profit largely in times where even the most stubborn company and also local-only businesses realize, customers increasingly tend towards comparing prices, be it on the spot or when still being at home. Companies have to be present on the internet and be willing to ship their services or goods via electronic or postal means.
Paypal Payments per Quarter, sharp rise with Covid, source: www.statista.de
PayPal reports almost 5% of the world population (7.8bn people) being users, so about 350 million of people are making use of PayPal’s services, 44% of them are US citizens; the number of user accounts scores 21% of growth YoY (Year-over-Year). Covid’s a big push for the electronic payment industry. Worldwide electronic retail is a market with a bright future. Buyers have become more avid about prices recently. The modern savvy customer is increasingly addressed by means of multi-channel selling and marketing involving, besides stores, mobile phones, apps, social media presence, face recognition, automated-intelligence, gamification, etc. So, the buyer has a good chance of buying at the cheap. The more old-fashioned clientele is taken good care of by the teleshopping sector, sales of which have been steadily increasing since 1997. Home shopping scores remarkable sales-growth also multi-channel, i.e. by means of websites and social media, but the telephone order still plays a major role. As per statista.de 1.92bn of people bought online in 2019, and e-retail sales surpassed USD 3.5bn. The biggest e-commerce vendors are Amazon scoring 5.5bn of visitors only in June 2020 followed by Ebay with 1.5bn. Payment is made electronically, and, of-course, this market is also blooming: judging by the worldwide electronic transaction volume it’s about to double now, e.g. from EUR 1.90bn in 2016 to 3.30bn by 2021. There’d be more to add in terms of successes, but what’s obvious already is: electronic payment together with online shopping will soar even more, and PayPal will have its share.
So, once you engage in “Bitcoin”, you can use it for whatever, almost without limit, it’s not only a thing to trade with.
Speaking of “limits”, the legal aspects cannot fully be ignored. Let’s shine a light on them.
Paypal launches a digital wallet and a cryptocurrency hub allowing to buy, hold and sell goods and services from 26 millions of merchants by means of Bitcoin, Bitcoin Cash, Ethereum and Litecoin. Having actually started on October 20th, 2020, this sounds more promising than it is as both taxes and regulations hit in, and as Paypal in view of the necessary legal framework has only entitled US citizens to make use of this service so far.
Paypal user accounts, source: www.statista.de
Tax authorities are regarding cryptocurrency as property. So, once Bitcoin is changed for cash taxes would have to be paid in case the Bitcoin’s value at that date exceeds the price it was once bought for.
At least, what’s required to determine the possible liability with the tax authority won’t be disclosed automatically, and as the history statements created by the PayPal won’t be enough to assess the possible tax liability the user instead has to track his record with crypto assets buying and selling in order to himself calculate the change in value he has to pay taxes for.
Now, this is oddly theoretical, but getting away with ease and decent profits with no taxes deducted is nothing that’s so possible in the first place. There’s no such thing as withdrawal of cryptocurrency holdings from Paypal. On closing a wallet with PP converting the held crypto assets into cash is required – and this creates a tax obligation.
Buying Bitcoin and likewise cryptos into the new wallet can be executed through PayPal only as no transfer to this wallet from an external wallet is allowed. There’s also no such thing as registering an already existing wallet with Paypal. Once opened and filled with crypto assets there is also no transfer from an external wallet allowed. These crypto assets then cannot be used to directly pay goods offered in fiat money, but instead the assigned crypto-assets have to be changed into fiat, and this use of cryptocurrency creates a tax obligation – plus a margin is charged by PP. In addition: closing a PP wallet requires changing back to fiat and paying both taxes and margin.
What’s denominated in cryptocurrency can be purchased. For a service, like for example a mobile phone, a hat, or an online webinar, coaching or any kind of non-goods payable via PayPal it is quite practical using cryptocurrencies as long as the seller does hold a crypto wallet with PayPal, too. It’s then within the seller’s liability to comply with the legal and tax related aspects arising with the income generated. Again: a purchase leading to a transfer out of your PayPal Cryptocurrency Wallet into another one external of PP is not an option. This might change once PP overcomes or outmaneuvers the not yet fully established legal restrictions and taxes scheme, but better not to expect much. Elon Musk might have handled this in a different manner, more with freedom in focus, but he not anymore is in charge.
As for now, Paypal’s venturing into crypto does not constitute much of freedom from law, order and taxes, but it’s a step into the right direction.
All in all: withdrawals from a PayPal crypto wallet or payments to clients not holding such a wallet themselves is not allowed. This can only be handled on changing Bitcoin and co back to fiat first which creates a taxable event. Transfer of external cryptocurrency-holdings into the PP wallet is not an option, and the user is recommended to track his buys and sells of cryptocurrency holdings himself (there are applets called “crypto portfolio trackers” available) in order to be able to comply with tax liabilities. Buying Bitcoins into the automatically generated PP wallet can only be done once a bank account or debit card is linked to an existing PP account or once a cash balance is held, purchases using any form of credit are not allowed. Noteworthy is that PP charges a spread on buying and selling of crypto assets.