tl;dr PayPal’s closed ecosystem for Bitcoin will finally make using Bitcoin for purchases a reality by allowing Bitcoin to be used on millions of merchants’ sites and simplify tax reporting by PayPal issuing 1099-B forms for those purchases.
I used to buy stuff with Bitcoin but it was such a pain in the ass to report every purchase on my taxes. There are a bunch of people that are anti-IRS in the Bitcoin community and don’t feel like people are obligated to report to the IRS their purchases using Bitcoin. I don’t want to debate that. Let’s assume every purchase that a person makes with Bitcoin needs to be reported on form 8949. When a person buys on exchanges like coinbase, binance, etc, those exchanges are an open eco-system. Once a bitcoin leaves those exchanges, those exchanges don’t know what happens to those bitcoins(for the most part). So, those exchanges can’t automate your tax filings.
PayPal has setup a closed eco-system where they know a person’s purchase history of bitcoin, their sales history of bitcoin and the history of when they bought something using bitcoin(via PayPal). So, PayPal has all the necessary information to generate a 1099-B for that person. A 1099-B completely simplifies tax filing for purchases made with Bitcoin.
To give you a concrete example. Let make the following assumptions:
I bought 1 bitcoin on August 1st 2020 for $10,000
On Sept 1st, 2020, I bought a TV for $2000 using Bitcoin and the price of one Bitcoin was $20,000.
So, let’s work through what happens if I used Coinbase to originally buy that 1 bitcoin. So I bought that Bitcoin and then I moved it to my hardware wallet. I had to pay some amount of bitcoin in transaction fees to move that bitcoin. To make things “simple”, let’s assume the network transaction fee was .01 btc. So that improves my cost basis but overall it cost me money but my new cost basis is .99 bitcoin for a $10,000(this makes the effective cost basis of 1 btc to be $10,101.01). Then I purchase the tv from my hardware wallet. There would be another network transaction cost but let’s assume it was free. Coinbase has no idea what I did with that bitcoin that I bought from them. So, it’s now my obligation to report my capital gain to the IRS since the price had gone up since I bought that bitcoin. So, my capital gain would be: I used .1 bitcoin to buy a $2000 TV. My cost basis of that .1 btc was $1010.01. So I had a capital gain fo $989.99 that I need to pay short term capital gain taxes on that.
Now I imagine that I buy a $4 cup of coffee every day. I have to do this calculation for every cup of coffee that I had. Complete and utter insanity to manually calculate the capital gain of every purchase a person makes. I decided it wasn’t worth it so I stopped buying things with bitcoin.
Let’s work through the example of the closed eco-system of PayPal. Since PayPal doesn’t allow me to move bitcoin in or out, they know exactly my cost basis of all of the btc that I have in my PayPal bitcoin wallet. Now I used a merchant that accepts PayPal(which is a lot of them) and I used the bitcoin that I bought via PayPal. PayPal knows exactly what my capital gain/loss is on that purchase. At the end of the year, they generate a 1099-B. All tax software can easily import a 1099-B. There is no manual calculation that I need to do. I don’t need to keep track of any cost basis. PayPal has literally solved what I believe is the number one issue of using bitcoin for day to day purchases. There are only three companies in the U.S. that could pull this off. They are PayPal, Visa and MasterCard. A company needs to be already integrated into merchants.
Also, when I make a purchase using my PayPal bitcoin wallet to a PayPal merchant, PayPal doesn’t need to register that transaction on bitcoin’s blockchain. So, there will be no network fee for that. Yes, this is centralization. Yes, this goes against a root philosophy of decentralization.
I understand a lot of Bitcoin purists dislike these choices of PayPal. I think it’s brilliant as a business strategy for PayPal. I personally will take the tradeoffs if PayPal makes it simply for me to make purchases with bitcoin. I think it’s great for bitcoin if this improves adoption rate, increases the number of merchants accepting bitcoin and brings bitcoin mainstream.
“According to Schulman, starting in the first half of next year PayPal will let users draw from cryptocurrency accounts to pay for goods and services at 28 million merchants that use the company’s platform.”