Paying for something with a crypto debit card generates a taxable event – either a capital gain or a capital loss – no matter how small the transaction is. Crypto credit card transactions – at least as they exist now – do not need to be reported, although that may change in the future.
The IRS (at least for now) considers cryptocurrency to be an asset. So if you trade it for another coin or purchase goods/services with it, that creates a taxable event.
Most People Do Not Use Crypto for Ordinary Transactions
Good or bad, most of us do not pay for a huge volume of transactions with crypto.
For all of the amazing things blockchain can do, historically cryptocurrency has not functioned particularly well as an actual currency. The price fluctuations were too volatile and transactions took too long to process. With the introduction of stablecoins and newer blockchains, both issues are getting better all of the time. But still: most of us are not making the majority of our purchases with crypto.
A Potential Solution: Crypto Cards
But these crypto cards could change that very quickly.
You’re just swiping the same way you would with a regular Visa or Mastercard. It just so happens that the transaction is being funded by your crypto instead of USD.
As an aside: so far all of these have been through centralized exchanges like Crypto.com or Gemini, but other projects like the Switch Reward Card are coming out with truly defi solutions. Switch is entirely run by a node network, which is pretty cool and also necessary for true decentralization.
Crypto Debit Cards
Debit cards are really straightforward on this. You are disposing of crypto in exchange for something else. So every single transaction – no matter how small – generates an event that you have to account for and report to the IRS.
Every Crypto Card Transaction Needs to Be Reported to the IRS…
That creates an absolute logistical nightmare in addition to possibly creating a surprise tax bill at the end of the year. You’d need to keep up with your cost basis and holding period for every time you swipe your card for $5 at a Starbucks.
…But New Legislation May Ease this Burden
There is some proposed legislation to help address this. In early 2022, the Virtual Currency Tax Fairness Act was introduced, which would exempt personal transactions $200 or under from these reporting requirements.
This would be immensely helpful, although it seems like there will need to be some provisions to ensure it is not abused. It’s easy to envision people selling $1 million worth of low cost basis Bitcoin in 5,000 individual transactions in an attempt to avoid the capital gains.
In the meantime, the best way to avoid the tracking nightmare would be to fund your debit card with a stablecoin or fiat. If you fund it with a stablecoin, you will still need to report the “sale” of your crypto on your tax return, but assuming there were no fees when you purchased the stablecoin, the transaction will be a net zero. And since there is no gain or loss, in practice your holding period also does not really matter. That is much easier than the alternative.
Crypto Credit Cards
Credit cards function differently – at least for now. As of writing, there are only a few crypto credit cards on the market, and they are all fairly new. As more launch, it is plausible that there will be more variations in how each project functions.
Some Crypto Credit Cards May Not Create Taxable Events for Every Transaction…
With credit cards, you aren’t immediately disposing of an asset/drafting the funds from your account the way you are with a debit card. Instead, you’re creating a liability. If these crypto credit cards function the same way that normal credit cards do, then swiping the card would not create a taxable event.
As an example, let’s say you use your crypto credit card for shopping and at the end of the month pay off the balance with a fiat currency from your bank account – the same as you would with a regular credit card.
Well, you aren’t really disposing of crypto at any point in that transaction, are you? In fact, crypto is not involved in the core transaction at all. The only time it even comes into play is that you are receiving crypto as a reward instead of cashback or points, which in and of itself is not taxable.
…But Others May Function the Same Way as Crypto Debit Cards
On the other hand, it’s feasible that some cards will function more like debit cards where each transaction is more closely tied to the crypto in your account, in which case each transaction might be reportable.
Conclusion: Legislation on Crypto Cards Is Still Confusing, but a Crypto Tax CPA Can Help
As always, crypto is a rapidly evolving area with very little concrete guidance from the IRS. This topic is no exception. The IRS has not specifically addressed crypto cards and as we’ve mentioned above there is currently legislation in place to address some of these issues. Make sure you are planning with your CPA throughout the year to ensure you are staying up to date with any changes.
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.
