Are There Stablecoin Taxes in the U.S.?

Stablecoins like DAI, USDC, and USDT, are often pegged to a fiat currency like the U.S. dollar. Here's how these crypto assets are taxed.

Zac McClure
ByZac McClure, MBAUpdated on August 17, 2022 · minute read

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Key Takeaways

  • Although capital gains or losses due to price fluctuations are often inconsequential, stablecoin transactions should be reported on your crypto taxes

Stablecoins are cryptocurrencies that are pegged to the value of a commodity or currency, and thereby designed to have a stable value. They are often pegged to the value of the US dollar and collateralized with reserve assets. For example, common stablecoins DAI, USDT, and USDC follow this model.

Recently, algorithmic stablecoins have been in the news. Unlike fiat backed stablecoins, algorithmic stablecoins like UST or AMP in principle rely on a complex series of protocol mechanisms to maintain a relatively constant value. However, as seen in the Terra Luna collapse, these mechanisms are not always successful. 

Many crypto investors assume that since stablecoins have a “fixed” price, they won’t owe capital gains tax. However, the situation is more complicated.

How are stablecoins taxed? 

Crypto taxes on stablecoin trades

Will you realize capital gains or losses on your stablecoin trades? Generally, no, you won’t have gains or losses—or if you do, they won’t be very large. 

Although stablecoin price fluctuations will typically be trivial and not contribute meaningfully to overall tax liability, stablecoin trades still need to be reported on your taxes. This is because they are cryptocurrencies, and thus considered property by the IRS.

Stablecoin transaction example

  • You purchase 50,000 USDT for $50,000

  • You later cash out the USDT for $50,012.75

  • You have realized a taxable event and need to report the $12.75 gain on your Form 8949 

Crypto taxes on stablecoin payments or wages

If you receive stablecoins as payment for goods or services, or as wages for a job, they will be taxed as ordinary income at the rate determined by your income bracket. 

Stablecoin income example

  • You perform a set at a festival and receive 5,000 DAI in return

  • You need to report $5,000 of income

What happens if a stablecoin loses value?

As seen after the 2022 Terra Luna collapse, significant gains and losses can occur if a stablecoin collapses. Many traders experienced massive losses on UST. These stablecoin losses, and any other crypto losses should be reported on your taxes. This is not only for record-keeping purposes, but also so that you can use the losses to offset income and/or capital gains.   

If you are holding a stablecoin that has lost all value, there may be an avenue for deducting that sum as a worthless security. However, there isn’t broad agreement between crypto accountants that this is a viable strategy, so you should speak to a crypto tax accountant or attorney. 

Will stablecoins be taxed in the future?

 In 2022, a House of Representatives bill proposed a regulatory framework for stablecoins in the United States. Additionally, a bill from Senators Toomey and Sinema proposes making crypto transactions of less than $50, as well as crypto transactions that realize gains of less than $50, non-taxable. 

Both pieces of legislation may affect stablecoin taxes, with the Toomey/Sinema bill making stablecoin gains less than $50 tax exempt, as well as any stablecoin payments of less than $50. However, at the time of writing, both bills are far from being passed, so traders should not expect tax-exempt stablecoin transactions in the immediate future.[1] 

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References

Last reviewed by Zac McClure, MBA on August 17, 2022 · Sources

Zac McClure
Zac McClureCo-Founder at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.

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