Converting Crypto to Stablecoins Triggers Taxable Events, Expert Confirms

Converting cryptocurrencies into stablecoins is unequivocally a taxable transaction, according to a recent clarification from crypto tax expert Shehan. This guidance addresses a common misconception among digital asset holders regarding the tax implications of moving funds into stable-pegged assets. The clarification emphasizes that such conversions are treated as disposal events by tax authorities, subject to capital gains or losses.

The Internal Revenue Service (IRS) classifies cryptocurrencies, including stablecoins, as property for tax purposes, similar to stocks or real estate. When an individual converts a volatile cryptocurrency like Bitcoin or Ethereum into a stablecoin such as USDT or USDC, it constitutes a "disposal" of the original asset. This disposal event triggers a calculation of capital gains or losses based on the asset's value at the time of conversion compared to its original purchase price.

Capital gains or losses are determined by how long the cryptocurrency was held before conversion. Assets held for one year or less are subject to short-term capital gains tax rates, which align with ordinary income tax rates. Conversely, cryptocurrencies held for more than one year before conversion are eligible for potentially lower long-term capital gains tax rates. These gains and losses must be reported on IRS Form 8949 and Schedule D.

Starting in 2025, major cryptocurrency exchanges will be mandated to report stablecoin transactions exceeding $10,000 to the IRS via Form 1099, increasing transparency and compliance requirements. Even small fluctuations in stablecoin value during a conversion can result in minor capital gains or losses that must be accounted for. The principle extends to swapping one stablecoin for another, which also constitutes a taxable event.

"Can I sell my coins into a stablecoin and not pay taxes? NO, this is a taxable transaction," Shehan stated in a recent FAQ.

This underscores the critical need for accurate record-keeping of all crypto transactions, including acquisition dates, costs, and conversion values. Tax professionals advise treating all stablecoin activity like other crypto assets to ensure compliance with evolving regulations, regardless of the perceived stability of the asset.