USDC (United States Dollar Coin) is a stablecoin offered by Coinbase that is traded on numerous exchanges. It has important implications for crypto traders, which will be discussed in this post.
Specifically, this article is for you if:
- You have local regulatory restrictions that make it hard for you to trade fiat to crypto.
- You want to keep your transactions within crypto but want to capitalize on price fluctuations.
- You want to send stable, backed money around the globe cheaply and quickly.
What is USDC?
USDC is a cryptocurrency created by Coinbase on the Ethereum blockchain. It maintains a stable 1-to-1 relationship with the US Dollar, meaning you can always exchange 1 USDC for 1 USD.
What sets USDC apart from other stablecoins is it comes with the trust and transparency factors that have been foundational to Coinbase’s success.
Unlike other questionable stablecoins, Coinbase has third parties audit USDC and ensures it is truly backed by US dollars.
What is a stablecoin?
If you’re wanting us to back up and explain the concept of a stablecoin, here you go. A stablecoin is simply a cryptocurrency that is pegged to another stable asset. In the case of USDC, it is pegged to the US dollar.
The way this stability is achieved matters greatly. If Coinbase says USDC is equally as valuable as a US dollar, how are they backing that up? In the case of USDC, Coinbase does maintain actual US dollars on reserve to achieve a true value.
A great example of how a stablecoin can fall apart is Tether (USDT). It was long claimed that Tether was backed by fiat, but third-party audits were not in place. You can read more about The Tether Death Sprial on Seeking Alpha.
The bottom line is you need to trust any stablecoin you use. You need to trust the issuer and trust that it has some backing in reality.
Why would I use USDC instead of dollars?
The real advantage of having a stablecoin tied to the US dollar is you can now send a dollar equivalent across the globe, cheaply and quickly.
As Coinbase puts it, this helps build an “open financial system for the world.”
“USD Coin allows unbanked and under-banked individuals in any country to hold a US dollar–backed asset with nothing more than a mobile phone.” –Coinbase
If you are not “under-banked,” you may simply want to utilize cryptocurrency in more day-to-day scenarios, but are challenged by the volatility.
Why should I trade using USDC?
Since we’re on Crypto-ML—a site for crypto traders–the most important question is what do crypto traders need to know about USDC?
Global reach and regulatory considerations
Exchanges need to deal with country-specific regulations. These regulations can be fast-changing, confusing, and cause a lot of variation on a country-by-country basis.
If you look at Coinbase’s Global Support, you’ll see many countries that limit your ability to exchange crypto for fiat. But you can trade crypto-to-crypto as much as you want.
This means that if you’re in a restricted environment, you’re still likely able to enjoy the benefits of crypto trading, as long as you trade against a stablecoin and not your local currency.
Most news and many trading systems are based on comparisons of Bitcoin to the USD. If you are not in the United States, that means fluctuations in your local currency are not being considered.
As an example, our machine learning models are considering USD-based data. So ideally, everyone making trades off of our data would choose either USD or USDC.
If you are on our Auto Trader membership, you will have noted you can trade against USDC.
Specifically, when you go to set up your trading pairs, you can select to trade BTC/USD, BTC/GBP, BTC/EUR, or BTC/USDC.
USDC solves global reach problems. Rather than supporting trades against many fiat currencies, systems can simply support USDC, which is available nearly everywhere. Ultimately, it may make sense for us to only allow USDC pairs.
As a Crypto-ML member, should I trade against USDC?
In general, yes. We recommend using USDC as our trading pair in most situations. This is true regardless of your global location.
Are USDC trading fees lower?
In general, most exchanges have trading fees that are the same regardless of what you’re exchanging. That is crypto-to-crypto trades have the same fees as crypto-to-fiat fees.
Currently, neither Coinbase Pro nor Binance differentiates between these scenarios.
Which crypto exchanges have USDC?
While Coinbase created USDC, it is available on a variety of exchanges. Rather than listing all exchanges here, just note that nearly all major exchanges offer USDC.
The Crypto-ML Auto Trade feature supports Coinbase Pro and Binance, both of which offer USDC. That means if you live in any country that gives you access to Coinbase or Binance, you’ll be able to trade.
Coincode.com maintains a list of exchanges that support USDC, which you can find here: https://coincodex.com/crypto/usd-coin/exchanges/
Are USDC trades taxed?
Now the big question for crypto traders: are trades against USDC taxed? After all, you are not exchanging Bitcoin for a dollar. Rather, you are doing a crypto-to-crypto exchange.
While every country has different tax codes, we can provide some US-based perspective. Also note that crypto taxes and laws are rapidly evolving, so you must consult a qualified tax attorney before making any decisions.
General crypto trading tax guidance
The basics of US crypto tax is as follows:
- Crypto received for goods and services should be taxed as ordinary income (mining and forks fall into this category).
- If crypto is bought and then sold for profit and:
- The crypto was held for less than one year, it is taxed as ordinary income.
- The crypto was held for one year or more, it is taxed as capital gains.
See Investopedia for updates and more.
The upshot is most traders will be looking at paying “ordinary income tax” on their trading profits.
Taxes on exchanges and swaps of like assets
US tax law has certain provisions for like-to-like exchanges. For example, a 1031 Exchange allows to move funds from one investment property (house) to another without paying taxes. Rather, instead of considering this a “sell” and “buy” transaction, 1031 exchanges are a “swap” which means taxes are deferred and considered as part of a whole when you finally sell. You don’t pay taxes at every step of the way.
Based on this concept, it seems there is a precedent for crypto-to-crypto trades.
However, the IRS also has a provision for the “exchange of property.” And it considers crypto as a type of property. Thus, exchanging BTC for USDC is a “taxable event.” Likewise, exchanging BTC to LTC would also be a taxable event.
Ideally, we’d see something along the lines of a 1031 Exchange in the future. But for now, any time you exchange crypto for fiat or another crypto, you’re triggering a taxable event and need to consider paying taxes.
For more on this, we recommend this Guide to Cryptocurrency Taxes by Cryptotrader.tax.