A Simple Guide to Stablecoin Taxes for 2023
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Stablecoins are cryptocurrencies pegged to a commodity or currency, typically the U.S. Dollar. They are backed by other assets or algorithmically and are primarily used to facilitate crypto trades.
Stablecoins are taxed like other cryptocurrencies, so if you realize a profit or loss on a trade into a stablecoin from another crypto, the usual tax consequences apply.
What is a stablecoin?
Stablecoins are cryptocurrencies that are typically 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. Read further to learn more about how to approach stablecoin taxes.
How stablecoins work
Stablecoins work by pegging their market value to an external reference, typically fiat. Because of this, stablecoins serve as a utility for the crypto ecosystem, acting as a medium of exchange with very little volatility.
Stablecoins are backed by reserve assets, including fiat and even gold, or by algorithmic supply controls.
Different types of stablecoins
There are three principal types of stablecoins, each similar in purpose but defined by the way they are collateralized or backed: Fiat, Crypto, and Algorithmic.
Fiat-collateralized stablecoins are backed by a reserve of fiat currency or currencies, most typically the U.S. dollar. These assure the stablecoin retains its peg and value. Other forms of collateral can be used, including gold, silver, and crude oil.
Crypto-collateralized stablecoins are backed by cryptocurrency. Because of crypto’s volatility, these stablecoins are overcollateralized. DAI is one example and collateralized by multiple fiat-backed stablecoins and a number of other cryptocurrencies.
Algorithmic stablecoins control supply algorithmically through preset formulas. They may also pair this with reserve assets. These are not unlike central banks that issue fiat without reserves to back it, although with a great deal less transparency and public policy. Famously the price of TerraUSD (UST) unpegged from the U.S. dollar in May of 2022 and lost more than 60% of its value.
How do I report stablecoin taxes on my tax return?
Transactions in and out of stablecoins from other cryptocurrencies are taxable. So if you purchase $20k of Bitcoin with fiat and its value climbs to $30k, which you then trade for USDT or another stablecoin, you are subject to the same capital gains consequences on the $10k as you would if you’d traded directly back for fiat.
Traders should use Form 8949 to report capital gains and losses from such trades. Income from stablecoins should be reported as “other income” with Form 1040 Schedule 1.
When in doubt, leverage our platform and expertise at TokenTax to make your cryptocurrency tax filing easy.
How are stablecoins taxed?
The IRS taxes stablecoins just like other forms of cryptocurrency. When you trade from other cryptocurrency into a stablecoin, either realizing a gain or a loss, the usual tax implications arise. If you receive payments in stablecoins for goods or services, these are treated as regular income just like fiat.
That noted, there are some nuances around stablecoins and the tax consequences that result from them, as well as pending legislation that may impact future tax seasons. Here's an in-depth look at some common issues around stablecoin taxes, with examples.
Crypto taxes on stablecoin trades
How are stablecoins taxed when used for 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. Are stablecoins taxable? Yes.
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
How are stablecoins taxed when received as 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. This legislation is still being considered and was updated late in 2022.
Note that 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 and should follow developments around stablecoin legislation on this blog to remain up-to-date.
Frequently asked questions
Here are some answers to some common questions around stablecoin taxes.
Do I have to pay taxes on stablecoins?
Are stablecoins taxable? Yes. Any time to realize a gain or a loss involving a stablecoin, you will need to report this on your taxes. If you receive payment for services in stablecoins, you must report it as regular income.
Is converting BTC to UDSC a taxable event?
Yes, converting BTC to UDSC or any other stablecoin is a taxable event with all the corresponding consequences for your tax filing.
Why buy stablecoins?
Stablecoins are a way to trade in and out of other cryptocurrencies without moving into fiat. There are a number of reasons a trader might choose to do so, including to use stablecoins to receive a return on staking (lending) them to exchanges or DeFi protocols, as collateral for crypto loans, or simply to time the market and remain within crypto to quickly trade for other crypto assets without going in and out of fiat.
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