In general, rewards received from crypto credit and debit cards are not taxable. They are considered a reduction in purchase price, not income. However, promotional amounts that are not tied to an actual purchase (such as some sign-up bonuses), are typically considered taxable income. When those crypto rewards are ultimately disposed of, this will also trigger a capital gain or loss.
Crypto Card Rewards Aren’t Usually Income
The vast majority of crypto transactions generate some kind of taxable event. Mining, staking, coin for coin trades – basically any activity seems to generate a transaction that you have to report to the IRS. As we noted in our last article, even just paying for something with your crypto debit card creates a capital gain or loss.
Because of this, many people are surprised to find out that the rewards received from crypto cards are not taxable. Why is that – especially since seemingly similar “free” crypto from airdrops and hard forks are both taxable?
It is treated this way because the IRS does not even consider these credit and debit card rewards income at all.
How?
The IRS classifies these rewards as rebates and reductions in the original purchase price, not income received.
In a somewhat related Private Letter Ruling (PLR-141607-09), the IRS noted that:
“Section 61 provides that gross income means all income from whatever source derived. A rebate received by a buyer from the party to whom the buyer directly or indirectly paid the purchase price for an item is an adjustment in purchase price, not an accession to wealth, and is not includible in the buyer’s gross income. See Rev. Rul. 76-96, 1976-1 C.B. 23, as modified by Rev. Rul. 2005-28, 2005-1 C.B. 997.”
But There Are Taxable Events Associated With Crypto Card Rewards
The exception to this would be rewards received that are not tied to a purchase at all. If you are given crypto just for opening an account and are not required to spend any money to receive it, it is likely that those rewards will be taxable income. In those cases, it is much more analogous to receiving an interest bonus for opening and funding a new bank account – not actually spending the money on a purchase. In those cases, the income is taxable and the bank is required to issue you a 1099-INT or 1099-MISC.
As always, it is worth noting that the IRS has not issued any guidance on crypto rewards cards specifically. But absent that, we use the existing precedent from regular credit cards and rebate programs.
One area where these crypto rewards will differ is when you actually use them. When you redeem your cashback or points, that doesn’t trigger a taxable event. You’re just buying something with cash or a cash equivalent. But if you use your crypto rewards to purchase something, that is the disposition of an asset.
This will create a capital gain in the vast majority of cases since your cost basis on the rewards is zero. You had no cost to acquire it and the IRS never considered it taxable income. Because the sale will be almost entirely profit, monitoring your holding period is important so that you can hopefully qualify for long-term capital gains.
If you fall into one of the rare cases where a promotional reward was classified as taxable income, then your cost basis will be whatever amount of income you were assessed (i.e. if you received a $200 taxable promo, when you sell the crypto your cost basis will be that same $200). The cryptocurrency could have gone down in value from the time received to when you sell it. In that case, you will have a capital loss when you sell the crypto, although those cases will be few and far between because most of the rewards will not be taxable to begin with.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
