Crypto credit and debit cards: Should you get one?


Coinbase launched its own debit card in an effort to promote the use of cryptocurrencies in payments as well as investing.

Coinbase

Some of the biggest credit card companies on the planet are trying to make it easier than ever to spend and earn bitcoin.

But accountants and financial advisers tell CNBC there is a massive catch. Every time you swipe one of these crypto cards, you’re logging a “taxable event.”

“The one thing that a lot of people don’t realize is that whenever you spend cryptocurrencies to buy a cup of coffee, or any type of consumer item, that triggers a capital gains event,” said Shehan Chandrasekera, a CPA and head of tax strategy at CoinTracker.io, a digital currency tax software company that helps clients track their crypto across virtual wallet addresses and manage their corresponding tax obligations.

There’s always a difference between how much you paid for the cryptocurrency, which is the cost basis, and the market value at the time you spend it. That difference can trigger income capital gains taxes, in addition to the other taxes you have to pay, such as sales tax.

But a lot of people don’t seem to care about the tax headache. 

Visa, which partners with Circle, BlockFi and Coinbase, told CNBC in July that more than $1 billion worth of cryptocurrency was spent by consumers globally on goods and services through their crypto-linked cards in the first six months of 2021.

Meanwhile, this summer, MasterCard will launch a credit card with crypto exchange Gemini, co-founded by billionaires Cameron Winklevoss and Tyler Winklevoss. 

The perks are indeed enticing: no annual fees, up to 4% back in crypto rewards whenever you buy something, and it offers an easy off-ramp for your crypto cash. 

But perhaps the biggest reason these tax implications aren’t getting people down is that they have no clue they are racking up a tax bill every time they use their card. 

“Some people are like, ‘Oh, I’m not selling my crypto, so I don’t have to pay capital gains taxes.’ But that’s completely wrong,” said Chandrasekera.

Buying coffee is a ‘taxable event’

The IRS treats virtual currencies such as bitcoin as property, meaning that they are taxed in a manner similar to stocks or real property.

“Anytime you receive, sell or exchange cryptocurrency, income would need to be recognized,” according to Shivani Jain, a certified public accountant and partner at accounting, tax and advisory firm Sax LLP. 

“When you make a payment using a Coinbase card, you are deemed to have sold the cryptocurrency, which results in a tax event,” she said.

The government essentially says that if you buy something with crypto, it is as though you liquidated your crypto, no different from selling any other property. The IRS also doesn’t care how small the transaction is — it’s still taxable. 

“There’s no minimum for capital gains. It applies for even a penny of gains or even less than a penny, in the case of a micro transaction,” said Neeraj Agrawal of Coin Center, a cryptocurrency policy think tank.

While it is probably unlikely that the IRS is going to come after you for a penny, Agrawal said, it does mean that you are technically not complying with the law if you make a penny’s worth of gains when you buy a coffee and fail to track that as a gains event. 

Experts tell CNBC that it is nearly impossible for bitcoin to work more like the cash that it was intended to be with rules like these, which are difficult to comply with completely.

“The current property treatment is very bad when it comes to consumer adoption of cryptocurrency as a method of payment,” said Chandrasekera. “And it is your responsibility to figure out the taxes, to keep good records of the cost basis and sales price.”

Agrawal said a solution is creating a “de minimis exemption” for crypto transactions, similar to what was proposed in the Virtual Currency Fairness Act introduced in the House last year. A de minimis exemption would mean that a set amount, perhaps up to $200, of capital gains for crypto-based transactions would be excluded from the capital gains reporting rule.

Loopholes

There are a few loopholes to avoid paying taxes every time you swipe your crypto card. 

Some cards, for example, are tied to a user’s stablecoin holdings. Stablecoins are a specific subset of cryptocurrencies that have a value pegged to a real-world asset, such as a fiat currency like the U.S. dollar or a commodity like gold. 

“There are no capital gains taxes, because it’s pegged to the U.S. dollar,” explained Chandrasekera. 

While there can be daily fluctuations of a few pennies, Chandrasekera says that in the end, it is immaterial, since it tends to balance out. “There could be days that you’re spending $0.98, others when you spend $1.02. So on an annual basis, it kind of zeroes things up,” he said.

Crypto rewards also offer another way to counteract some of these capital gains taxes. 

When you spend with one of these cards you can earn up to 4% back in a crypto reward of your choosing. Those crypto rewards have the potential to appreciate more than a reward denominated in a fiat currency such as the U.S. dollar. And like most card-based reward programs, the amount earned will likely not be taxable. 

“As of now, the IRS has no guidance on how crypto rewards for spending will be taxed. However, if we look at how the IRS treats credit card rewards, we see that they are treated as rebates or discounts and are generally not taxable,” said Jain.

That means that in the interim, until further IRS guidance is available, it would be reasonable to treat crypto rewards in a similar fashion, according to Jain. 

Chandrasekera agrees that these rewards are probably not going to be taxed because crypto rewards are not an earned income to the spender but are instead considered a discount on the sales price of whatever they’re buying. 

And then, of course, there is the potential for the transaction to amount to a capital loss, which is the flip side to the capital gains obligation. Chandrasekera says that these types of crypto debit card transactions would actually result in tax write-offs. 

Again, the onus is on the user to calculate these losses, which can prove cumbersome, since they would have to do it for every single crypto card transaction. 

Experts told CNBC that ultimately they’re skeptical as to whether a crypto card is worth the accounting acrobatics required. But the data appears to show that for now, at least, users are piling in to these cards.



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