Bitcoin was originally designed to remove financial intermediaries (read: banks) from electronic transactions, but until retailers start embracing crypto, crypto holders still must convert their cryptocurrency into fiat currency before spending it for the vast majority of purchases. The good news is that crypto debit cards are streamlining the process!
Let's take a look at why you may want to consider crypto debit cards, where to find them, and other important considerations.
Why Crypto Debit Cards?
Most people are familiar with the idea of a wallet that lets you send and receive cryptocurrencies. While some retailers accept crypto payments, most consumers still require fiat currency for the vast majority of their monthly transactions. You can't easily buy food at the grocery store or home goods at a mass market retailer with your crypto wallet.
Debit cards are payment cards that deduct money directly from your checking account to pay for a purchase. In addition, you can use debit cards to withdraw money from an ATM if you're making a cash-only purchase. These dynamics differ from credit cards where a bank is extending you a line of credit that you must repay at the end of each month to avoid penalties.
Crypto debit cards aim to solve crypto programs with debit card technology. You can use a crypto debit card to make a purchase anywhere that debit cards are accepted and the purchase amount is deducted from your crypto wallet balance. In the process, cryptocurrency is exchanged for fiat currency before it's transferred to the merchant.
Where to Find Crypto Debit Cards
There are more than 30 different providers of crypto debit cards, but only a handful are available in the United States. With more than ten different cryptocurrencies supported, Nexo Card and Uphold are the two most popular debit cards in the U.S. market with low fees.
Let's take a look at the differences between each provider:
Data Source: Cryptowisser.
There are many different factors to keep in mind when deciding on the right card:
- How reputable is the issuer and do they have insurance in place? Are you comfortable holding crypto in the debit card provider’s exchange or wallet?
- What are the fees associated with the debit card? How much does it cost to obtain a plastic card? What are the transaction or ATM fees? Are there any percentage fees or spreads on the conversion of crypto to fiat currency?
- Does the issuer support the cryptocurrencies that you’d prefer to hold? Many issuers only support Bitcoin, but a handful support a wide variety of cryptocurrencies.
It’s important to carefully consider these factors before making a decision in order to avoid unexpected losses or surprises upon making transactions.
What Are the Pros and Cons?
The biggest benefit of crypto debit cards is that you can easily spend your crypto balance on fiat purchases without having to manually sell cryptocurrency, wait for the transfer to your bank account, and then make any transactions. It's a seamless process that opens the door to more widespread cryptocurrency usage among consumers as their primary value store.
On the other hand, the biggest drawback of crypto debit cards is the taxes and fees. Coinbase Card charges a 2.49% "Crypto Liquidation Fee", fees for ATM withdrawals over certain amounts, and certain international transaction fees. You must also pay capital gains tax on any conversion of crypto to fiat currency, which could add up with regular spending.
Crypto investors may also want to reconsider the use of crypto debit cards for the same reason that they'd avoid brokerage debit cards — it provides a convenient way to draw down your investment capital! If your goal is to hold crypto as a long-term investment, you want to avoid signing up for tools that make it too easy to cash in those investments.
Track Your Transactions
Crypto debit cards can significantly complicate your tax reporting each year. Under the current IRS rules, everyone that trades cryptocurrencies must aggregate their transactions and compute their year-end capital gain or loss. The tax assigned to these gains depends on how long the cryptocurrency was held (e.g. if less than or greater than a year).
ZenLedger automatically aggregates crypto transactions across multiple exchanges and wallets — including crypto card exchanges — and computes your capital gains or losses. You can even autofill popular IRS forms, such as Form 1040 Schedule D and Form 8949, or identify tax loss harvesting opportunities that you can use to offset your total tax bill each year.
ZenLedger’s Tax Loss Harvesting Google Sheets Export - Source: ZenLedger
It’s also important to work with an accountant that’s familiar with cryptocurrencies to avoid any costly mistakes. While ZenLedger provides a full audit trail, you may still be on the hook for fines and penalties if your accountant doesn’t properly report the data. Good accountants can also help you find ways to save money on your taxes.
The Bottom Line
Cryptocurrencies were originally designed to avoid conventional financial intermediaries, but retailers have yet to fully embrace crypto payments. Until then, crypto debit cards promise to bridge the gap and streamline the process of making payments in the fiat world with cryptocurrencies held in wallets.
Before using crypto debit cards, it's important to keep in mind the taxes and fees associated with the transactions. The IRS currently requires the calculation of capital gains or losses for each crypto transaction. Fortunately, ZenLedger simplifies the process of complying with these requirements and enables crypto debit card users to avoid a ton of legwork.