Crypto cards offer great rewards and low fees — but they can also be a tax nightmare.
Regular usage of a cryptocurrency card can lead to hundreds or even thousands of taxable events.
In this guide, we’ll break down the tax implications of crypto debit cards and credit cards and share a simple step you can take to track your tax liability.
Let’s break down some of the differences between crypto debit cards and credit cards.
Crypto debit cards allow you to make payments in cryptocurrency. These debit cards allow you to spend cryptocurrencies that you store in your account or wallet and are typically accepted by any vendor that accepts debit cards. Generally, when you make a purchase, the cryptocurrency that you hold is automatically converted into fiat currency.
Just like other credit cards that you may have used in the past, crypto credit cards allow you to make purchases even if you don’t have money in your account and pay off the balance later. However, instead of offering incentives like cashback in fiat or airline miles, crypto credit cards typically offer rewards in Bitcoin or other cryptocurrencies.
Yes. The IRS considers cryptocurrency a form of property, similar to real estate and stocks. That means that cryptocurrency purchases and rewards are subject to both capital gains and income tax.
If you’re using a debit card that converts crypto to fiat for individual purchases, you’ll need to keep track of each individual transaction. To accurately calculate your taxes, you’ll need to report the value of your crypto when you originally received it and the value of your crypto when it was converted to fiat currency.
Let’s look at an example to understand how an individual purchase might be taxed.
Some debit cards allow customers to transfer their cryptocurrency to fiat on a lump sum basis rather than on a transaction-by-transaction basis. In this case, the conversion from crypto to fiat is still treated as a taxable event. However, there’s no need to report each individual purchase on your tax return.
Many crypto debit cards support stablecoin purchases. It’s important to remember that stablecoin is treated the same as any other cryptocurrency for tax purposes and will still be subject to capital gains tax.
However, it’s likely that any capital gain that you incur will be close to zero.
Believe it or not, using your cryptocurrency card can actually reduce your tax bill for the year — provided that the price of your tokens has fallen since you originally received them.
If the fair market value of your cryptocurrency is lower than it was at the time you purchased it, you can claim a capital loss on your cryptocurrency taxes. This can offset your capital gains for the year and up to $3000 of ordinary income.
For more information, check out our guide to tax loss harvesting.
While the IRS has not provided specific guidance on crypto debit cards, it’s reasonable to assume that they will be taxed similarly to traditional debit cards.
Historically, rewards that are given simply for opening a new account have been considered income by the IRS.
However, debit card rewards that are given as a reward for spending have historically been considered non-taxable ‘rebates’, rather than income.
Crypto credit cards are taxed differently than debit cards. When you make a purchase, you are simply making a purchase on credit rather than converting your existing cryptocurrency to fiat. That means you will not incur capital gains on transactions.
Based on how the IRS has treated credit card rewards in the past, it’s reasonable to assume that rewards that are given simply for opening a new account with no spending requirements will be considered income. However, rewards with spending requirements will most likely be considered non-taxable rebates.
Disposing of either your debit or credit card rewards will be considered a taxable event. If you sell the rewards you receive, trade them for other cryptocurrencies, or use them to buy goods or services, you may incur capital gains depending on how the price of your rewards has fluctuated since you originally received them.
Let’s cap things off by answering a few frequently asked questions on crypto debit cards and credit cards.
Are crypto debit cards worth it?
Crypto debit cards may require more tax payments than traditional debit cards. However, crypto debit cards often have lower fees and higher rewards.
Are crypto cards rewards taxed?
While rewards for opening a new account will most likely be considered income, rewards with spending requirements attached will most likely be considered a non-taxable rebate.
Do I have to pay tax on transactions made with stablecoin?
Stablecoin transactions are taxable. While your capital gain may be close to zero, you will still need to report your transactions to the IRS.
If you are making thousands of transactions on your crypto card, you might be in for a busy tax season. Each taxable event needs to be reported to the IRS, and it’s difficult to keep track of each transaction on a spreadsheet.
Cryptocurrency tax software like CryptoTrader.Tax can help. The platform integrates with card providers like Coinbase and Crypto.com to automatically record transactions. Once you have your data synchronized, you’ll be able to file your tax report in minutes.
Get started with a free preview report today. There’s no need to enter your credit card information until you’re 100% sure the information you have is accurate.