As cryptocurrencies have flourished in the last decade, it is clear that we are at the cusp of a new financial age. Early crypto adopters envisioned the beginning of a significant shift from the traditional finance ecosystem to a decentralized one. While their prediction was accurate and crypto has become as legitimate as traditional fiat currency, they might not have predicted crypto and traditional financial products working in conjunction.
In recent developments, crypto-verse and legacy finance have come together in the form of Coinbase debit card. Coinbase, one of the largest crypto exchanges in the market, is offering a Visa debit card that gives a certain percentage of your purchase as a “cashback.” But if a lot of knotty questions are popping in your head such as what is the Coinbase debit card? How does it work and will it affect my taxes? Then you are at the right spot. But first, What is it?
What is a Coinbase Debit Card?
With a Coinbase card, you can spend any cryptocurrency stored in your Coinbase account. However, it must be kept in mind that this isn’t a credit card and you can only use the token in your Coinbase wallet.
You can choose any currency you wish to spend on a purchase and which currency you wish to receive as a cashback. If you spend US dollars or USDC, Coinbase doesn’t charge a fee, but if you make a purchase using cryptocurrency, you will be charged a 2.49 percent fee. Additionally, the Coinbase debit card limit is $2,500 per day and the ATM withdrawal limit is $1,000 a day. Coinbase is available to eligible customers and it has no annual or sign-up fee.
Now that we have touched upon the basics of the Coinbase card, let’s explore how it works.
How Do Coinbase Debit Cards Work?
First of all, we need to understand that using cryptocurrency still has its limitations and it is not as widely accepted as the traditional fiat currency. You cannot walk into a shop and buy goods with Bitcoin as most retailers don’t accept crypto as payment. Second, retailers are always unsure about digital currencies due to multiple reasons such as exchange rate volatility, the uncertain legal status of payment processors, and the lack of understanding of blockchain, the technology that powers cryptocurrency.
With that being said, let’s understand the workings of the Coinbase card with an example:
Let’s say John walks into a coffee shop to buy a cup of coffee. While the coffee shop doesn’t accept crypto as payment, it certainly accepts debit cards. Eager to use his crypto debit for the first time, John hands the card to the cashier and gets his cup of coffee. When the cashier swipes the card, the processing company reaches John’s crypto wallet and takes the dollar amount of tokens needed for the cup of coffee. Further, the processing company converts the crypto into regular currency and delivers it to the coffee shop’s account directly. After the purchase, John can receive up to 4 percent cashback in the crypto of his choice. This happens in a matter of seconds and illustrates the way crypto is becoming more accessible in the form of payment but is this card really useful? Let’s find out.
Are the Cashback Rewards Considered as Income?
At present, there isn’t any guidance issued by the Internal Revenue Service (IRS) about debit card rewards in the form of crypto tokens. However, according to the existing directions, the IRS is most likely to deem cashback rewards as nontaxable income.
The IRS has used this guidance for conventional cashback rewards and airline miles gathered via credit cards. The rewards earned are deemed an “after-the-fact” discount applicable to the purchase. However, if the customers abuse the rewards program to create a tax-free wealth, the IRS may take a different stance on the matter.
Important: Report your cashback rewards from the Coinbase card on your tax return to get the non-taxable status on the rewards and avoid problems with the IRS.
Do I Have to Pay Taxes on Transactions made with Coinbase Debit Card?
Almost every purchase made with the Coinbase card is considered taxable because when you are making a purchase, Coinbase converts crypto into fiat currency, which creates a disposition of your property. The disposition of your property leads to capital gains or losses on all purchases irrespective of the asset you use resulting in a taxable event.
Do I have to pay Taxes If I Spend a Stablecoin for Purchases?
Yes, making a purchase through a Coinbase card using a stablecoin like USDC triggers a taxable event. Even if USDC and several other stablecoins are closely connected to the US dollar in terms of price, their value still fluctuates constantly.
Due to this fluctuating price, you can either have a capital gain or loss anytime you spend this asset using the Coinbase card. Such capital gains or losses gathered from stablecoins are likely minimal in nature but they can add up. If you are using stablecoins and not reporting said capital gains and losses to the IRS, then you risk falsifying your gains and losses on Form 8949.
If hypothetically, the price of the stablecoin didn’t change between its time of acquisition and disposal, you don’t owe any capital gains tax. However, it is crucial to report these transactions properly to show there was no profit.
What About Mined or Staked Rewards To Make Purchases via Coinbase Card?
If you make a purchase using your mined or staked crypto rewards through the Coinbase card, they are still taxable because when you gain rewards via mining or staking they are considered as earnings, and their Fair Market Value gets noted at the time of procurement.
When you make a purchase using these rewards, you move them to your Coinbase portfolio from your wallet and convert them into fiat currency using the Coinbase card, creating a disposition of property and triggering a taxable event.
Crypto Debit Cards vs. Traditional Debit Cards
On a fundamental level, crypto debit cards and traditional debit cards work in the same manner. However, crypto debit cards have a few perks that traditional debit cards don’t offer. For instance, several crypto debit cards don’t charge exchange rate expenses from the users. Another perk is that you don’t need a bank account for making transactions, however, you need a crypto exchange account or a wallet. Thus, online transactions are much faster and more convenient.
Pros and Cons of Crypto Debit Cards
The Coinbase card or other crypto debit cards have their benefits but they have some drawbacks as well. Let’s cover them one by one.
- You can spend cryptocurrency like traditional fiat currency
- Less or no foreign conversion fees
- Some cards offer substantial cashback rewards
- Some cards waive off ATM withdrawal fees
- Making a purchase is a taxable event
- You have to pay transaction fees (hefty if the transaction is big)
- Rewards are not paid out immediately meaning if it takes a couple of days to pay the reward, the price of a token may go down, diminishing the value of your reward.
- Not all merchants accept Coinbase or other crypto debit cards
- Geographical restrictions may apply too
Even though every purchase you make triggers a taxable event, it is still one of the most secure ways to make a transaction. But, reporting each and every purchase to the IRS is a bit of a nuisance as a failure on your part to report a transaction may run the risk of falsifying your capital gains or losses.