Stablecoins are a crucial part of the cryptocurrency ecosystem, setting a record $7.1 trillion in trading volume in 2022, surpassing the combined volume of credit card companies Mastercard, American Express and Discover. The most popular stablecoin of them all is USDC (US Dollar Coin). Pegged to the value of the almighty US Dollar, it’s been adopted by nearly every cryptocurrency exchange, wallet, and payment provider.
Did you know you have to report and may have to pay taxes on your USDC transactions?
In this guide, we will take you through the ins and outs of how taxes work with USDC. Whether you are trading, earning income, spending or converting USDC to other crypto, we’ll break down each transaction and its reporting on your tax return.
How is USDC activity taxed?
Similar to other cryptocurrencies, USDC is treated as property for US Tax purposes. Thus, your USDC will be subject to either capital gains tax or income tax depending on the type of transaction undertaken.
Capital gains tax
You’ll be subject to capital gains (or losses) when you trade or spend USDC, or if USDC de-pegs significantly.
Your capital gains tax rate depends on the amount of capital gains and the period of holding.
USDC held for less than 365 days will be classified as short term gain or loss and USDC held for greater than 365 days will be classified as long term gain or loss.
The tax rate for short term capital gains is the same as your income tax rate (refer to the gain or loss table below)
The tax rate for long term capital gains is based on the amount of gains. Tax rate varies between 0% to 20% (refer to the table below)
Income tax
You’ll be subject to income tax if you receive payments for goods or services in USDC In addition, if you lend or stake your USDC to earn yield or interest on it, such earnings are considered taxable income.
Together with all the other income you earn throughout the year, your income tax rate will depend on the federal tax bracket in which you fall.
Next we’ll look at some common USDC transactions and their tax implications with examples.
Trading USDC for another stablecoin
Trading one crypto for another crypto (including stablecoins) is considered a taxable event and is subject to capital gains tax.
You will incur capital gains based on the price fluctuation of the USDC since the original purchase date. Most of the stablecoins including USDC are pegged to the US Dollar, therefore it is likely that the capital gains is going to be almost 0. However, you will still be required to report your transactions on your tax return.
Trading crypto for USDC
Same as above; trading one crypto asset for another crypto asset, including stablecoins, is a taxable event.
When you trade your Bitcoin or Ethereum for USDC it will be considered as a disposal event. Capital gains will be incurred based on the price fluctuation of the asset since the original purchase date.
Receiving USDC as payment
Receiving USDC as a payment for providing goods or services will be treated as ordinary income and the tax rate will depend on the federal tax bracket in which you fall.
Spending USDC
Spending USDC for purchasing goods or services is treated as a disposal event and capital gains will be payable on the price fluctuation since the asset’s original purchase date.
Transferring USDC between wallets
Transferring any crypto assets between one’s own wallet is not taxable and not required to be disclosed on the tax return.
Interest from staking USDC
Many popular exchanges and DeFi protocols allow users to lend or stake their USDC and earn yield or interest on it. In this case, the interest or yield is treated as ordinary income and taxed at the applicable federal income tax rate.
Loss set-off if USDC de-pegs significantly
Stablecoins sometimes do de-peg slightly due to market conditions. However in extreme circumstances a stablecoin can be permanently de-pegged.
In 2022, UST, an algorithmic stablecoin, de-pegged and lost its value completely since the algorithm failed due to a faulty design.
In such cases, taxpayers can dispose of their de-pegged stablecoins and claim a capital loss on their tax return. This can be off-set with other crypto gains for the year and up to $3,000 against any other income.
IRS forms to use for reporting
Capital gains and losses arising from disposal of USDC should be reported on IRS Form 8949.
Interest or other income should be reported as “Other Income” in Schedule 1 of Form 1040.
Use Bitwave to keep track of your USDC transactions to make tax filing easier
Bitwave helps you keep track of all your USDC transactions, so you can easily report them on your tax return. Our robust Tax Module provides comprehensive and ongoing monitoring of your tax liabilities.
- Calculate gains and losses for both short term and long term capital gains, with a cost basis for every transaction.
- Choose the crypto tax strategy that aligns with your business goals, including FIFO, LIFO, Cost Averaging, Spec ID, and HIFO.
- Get access to our team of blockchain and accounting experts that have the knowledge and tools to help you manage your digital asset taxes with confidence and ease.
Don’t wait. Contact us today to learn more or schedule a demo and see how Bitwave can simplify your USDC tax reporting.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
