PayPal Taxes and 1099 Forms

Learn everything you need to know about PayPal taxes, PayPal 1099 forms, whether PayPal reports to the IRS and PayPal crypto taxes.

Does PayPal tax you?

Yes and no. Many of your PayPal transactions are taxable, but the onus is on you to report and pay any tax due on your PayPal transactions.

Will PayPal send me a 1099?

Yes. PayPal may issue 1099 forms depending on your transactions. PayPal issues the following 1099 forms:

• Form 1099-K: An IRS form used to report goods and services payments over $600 in a given financial year.

• Form 1099-INT: An IRS form used to report any customer who received over $10 in interest in a given financial year.

• Form 1099-MISC: An IRS form used to report any miscellaneous income over $600 in a given financial year.

Remember, whenever you receive a 1099 form, the IRS receives an identical copy.

Does PayPal report to the IRS?

Yes. The IRS made it mandatory for all payment processors (like PayPal) operating in the US to provide information to the IRS about customers receiving payments on their platform.

Does PayPal report to the IRS on friends and family?

PayPal Friends and Family transactions are generally tax-exempt and not reported to the IRS. However, if PayPal believes you’re misusing the Friends and Family transaction feature and using it to avoid taxes, PayPal may disclose this information to the IRS. 

Does PayPal send a 1099 for friends and family?

If you're sending and receiving through PayPal's friends and family option, then these generally won't be reported to the IRS. However, many PayPal users have previously tried to exploit this loophole, so if PayPal suspects you're using this feature for commercial purposes, then a 1099 form may be issued.

How to avoid PayPal 1099

If you have taxable transactions or meet the given threshold limit, you can't outright avoid a 1099 form from PayPal. There are some steps you can take to reduce the likelihood though, including:

• Keep your personal and commercial transactions separate

• Monitor your earnings and stay below the $600 threshold

• Avoid large, frequent transfers - even if they’re from friends and family

Remember to stay organized and put aside any estimated tax due ahead of time, so you're not left in the lurch later on.

PayPal crypto taxes

The simplicity of the platform has a silver lining - it means your PayPal crypto taxes are pretty straightforward.

You can only make a few different types of transactions using your PayPal crypto wallet. Each has a different tax treatment like so:

• Buying crypto: tax free!

• Holding crypto: tax free in most countries (some countries with a Wealth Tax may apply tax to crypto assets held if your total net worth is over a given amount).

• Selling crypto: Capital Gains Tax

• Spending crypto: Capital Gains Tax

• Transferring crypto: tax free!

As you can see the good news is that buying and holding crypto is almost always tax free, depending on where you live. However, there are a couple of countries where technically holding crypto may be taxed via a Wealth Tax - like Spain, the Netherlands, Switzerland, Italy, and France.

So the only tax you’ll pay on your PayPal crypto is when you sell your crypto for fiat currency - like USD - or spend your crypto on goods or services. This is because crypto is seen as a capital asset - not a currency - which makes it subject to Capital Gains Tax rules. When you dispose of a capital asset by selling it, trading it, spending it, or (sometimes!) gifting it - you’ll pay Capital Gains Tax. You can learn more about US crypto tax in our guide.

Don’t worry - you won’t pay Capital Gains Tax on the full amount, only any perceived capital gain (profit). A capital gain or loss is the difference in value from when you bought your crypto to when you disposed of it. If the value of your asset has increased since you bought it, you’ll have a profit (capital gain) and you’ll pay Capital Gains Tax on that profit. You can also include any fees when calculating how much profit you’ve made, this is easier to understand with an example.

How do you report PayPal crypto taxes?

So now you know if you sell or spend crypto on the PayPal crypto hub - you need to pay tax on it. But how do you report your crypto taxes to the IRS?

You report your crypto capital gains and losses to the IRS as part of your Individual Tax Return. You need to list each disposal (sale or spend) on IRS Form 8949 and your net capital gains and losses on Schedule D. For a step-by-step guide on reporting crypto to the IRS, check out our US Crypto Tax Guide.

Previously reporting PayPal crypto taxes was pretty easy as your crypto was effectively locked on the platform. This meant PayPal could easily issue crypto tax forms to users that have the correct calculations and cost basis and you could file this with the IRS. However, this has changed as you can now transfer crypto to and from your PayPal wallet.

This doesn't mean your PayPal crypto tax form will definitely be incorrect. It all depends on whether you've transferred crypto from your PayPal wallet. Let's dive a little deeper into it.

PayPal crypto tax forms

PayPal issues crypto tax forms for users with crypto investments - and you've got a couple of options on what to download depending on how you've used your wallet, mainly, whether you've transferred to or from your wallet. There are two main documents you'll be able to download:

• Crypto Transaction History CSV file

• Crypto Gains and Losses CSV file

You can download these forms from the statements and tax center section of your PayPal account.

If you've only bought, held, traded, and sold crypto assets on PayPal and have made no transfers at all - you can likely use your gains and losses CSV to file as this should be correct. Please note for US investors, the gains and losses CSV file only uses the HIFO accounting method, so this may not result in the most desirable tax outcome for your individual circumstances.

However, if you have transferred crypto to or from your PayPal crypto wallet - it's a little more complicated as PayPal will be unable to track your cost basis and therefore your gains and losses CSV file may be incorrect. In this instance, you can download the Crypto Transaction Statement from your PayPal account. This is a CSV file that includes the date you acquired/sold a given cryptocurrency, the quantity of crypto, fees, the value, and the transaction ID. You can then upload this to a crypto tax calculator like Koinly to let it calculate your PayPal crypto taxes for you.

For crypto taxes, use Koinly!

If you’re only using PayPal to buy and sell crypto then your crypto tax reporting is relatively straightforward! But the reality for most crypto investors is that they’re using multiple exchanges, wallets, and blockchains for their crypto investments - which can make crypto tax reporting a real headache.

Fortunately, Koinly makes crypto tax simple. All you need to do is sync the wallets, exchanges, and blockchains you use with Koinly via API integration or through a CSV file import of your transaction history. Koinly connects easily with PayPal!

Once you’ve done this, Koinly calculates your cost basis, capital gains and losses, crypto income, expenses, and more and summarizes all of this for you (for free!) in a tax summary.

If you’d like to download a tax report, upgrade to an affordable Koinly plan and you’ll be able to download a variety of tax reports based on your location including Form 8949 and Schedule D, Schedule 1, TurboTax report, and TaxAct report.

Koinly makes crypto tax simple. Connect Koinly and PayPal today.