1. Pay state taxes
2. Tax forms printed from Paypal's database
I don't have a PayPal account, but is this true? They are linked up with the IRS and will print you tax forms and allow you to pay taxes all through their platform? If this is the case, then there is absolutely zero chance that they won't report every crypto "purchase" to the government ("purchase" in quotation marks since we've already established you aren't actually buying crypto with PayPal, you are just buying fake price exposure). All the more reason to avoid this if you have any sense at all. It's all the worst parts of a privacy invading centralized exchange, with the added disadvantage that you don't actually get to own, withdraw, transfer, use, or spend actual bitcoin.
In order for a government to control a product, service, type of currency - they have to track it first.
Absolutely, and they are already doing this quite well with centralized exchanges reporting all your activity to them and by leasing blockchain analysis software from a variety of companies, such as Coinbase.
They absolutely do. One of the biggest issues I have is this is prime territory for seizure of assets, and Paypal has done it numerous times in fiat. For example, if you sell an item they can hold the funds up to 21 days. This might not be long term seizure, but if they can do this then they can absolutely seize in other areas. Another prime example is if their is a dispute between two parties, they place the transaction on lockdown until they can review (had a friend they did an 18 month review on for $312 USD).
Their new prime way of dealing with people is through the use of the "friends and family" transfer. If people don't realize this was a way to arbitrage accounts, I can't help you, lol. First thing they started doing was "temporarily suspending" accounts to investigate if the person was really you friend or not (priceless).
All I can say is if you are going to use Paypal for any type of crypto, proceed with extreme caution. People don't understand the tricks that Paypal use in order profit, why else would they hold you money or crypto for weeks other than to collect off of the interest.