August 12, 2022

What are the tax implications of crypto debit and credit cards?

Crypto credit cards provide excellent incentives and minimal costs, but they might also be a financial tax minefield.

Hundreds or even thousands of taxable events may occur as a result of frequent use of a cryptocurrency card.

In this article, we’ll break down the tax consequences of crypto debit cards and credit cards, as well as share a simple method to keep track of your tax liability.

Crypto debit card vs. crypto credit card?

Let’s look at some of the distinctions between crypto debit cards and conventional credit cards.

Crypto debit cards explained

A cryptocurrency debit card is a type of crypto debit card that allows you to make payments in digital currency. These prepaid cards allow you to spend cryptocurrencies stored in your account or wallet, which are generally accepted by any merchant that accepts debit cards. When you make a purchase, the cryptocurrency you own is usually automatically changed into fiat money.

Crypto credit cards explained

Similar to other credit cards you may have previously used, crypto credit cards enable you to make purchases even if you don’t have money in your account and pay off the balance later. Instead of providing rewards like cashback in fiat or airline miles, crypto credit cards typically give Bitcoin or other cryptocurrencies as a form of prize.

Are digital debit cards and credit cards subject to taxation?

Yes. Cryptocurrency is considered a type of property by the IRS, much like real estate and equities. As a result, gains on cryptocurrency transactions and rewards are subject to both capital gains and income tax.

How are crypto debit cards taxed?

If you’re making individual purchases with a debit card that converts crypto to fiat, you’ll have to keep track of each transaction. To properly compute your taxes, you should record the value of your cryptocurrency when you acquired it and the value of your cryptocurrency when it was converted to fiat currency.

Let’s look at a scenario to see how an individual purchase is taxed.

Customers can transfer their cryptocurrency to fiat in one transaction rather than on a transaction-by-transaction basis with certain debit cards. In this scenario, the conversion from crypto to fiat is still considered a taxable event. However, you’re not required to record each purchase on your tax return.

What about purchases made with stablecoin?

Stablecoins are not only accepted by crypto debit cards, they’re also allowed. It’s crucial to note that a stablecoin is taxed the same as any other cryptocurrency and will be subject to capital gains tax.

However, most likely, any capital gain you make will be close to nothing.

Are there any tax advantages to using a crypto debit card?

It’s true. Using a cryptocurrency card might help you save money on your taxes this year, provided that the value of your coins has dropped since you bought them.

You can deduct a capital loss for cryptocurrency if the market value of your crypto is lower than when you bought it. This might reduce your capital gains for the year and up to $3000 in salary.

Are debit card rewards taxable?

While the IRS has yet to provide specific guidance on crypto debit cards, it’s reasonable to assume that they will be taxed in the same manner as traditional debit cards.

Historically, the IRS has regarded rewards given simply for creating a new account as taxable income.

When it comes to income taxes, though, debit card rewards that are given as a reward for spending have historically been referred to as non-taxable “rebates.”

How are crypto credit cards taxed?

The taxation of crypto credit cards is distinct from that of debit cards. Rather than converting your existing cryptocurrency to fiat, you’re making a purchase on credit. That implies you won’t have to pay capital gains on purchases.

Are credit card rewards taxable?

Based on how the IRS has treated credit card rewards in the past, it’s fair to guess that points given just for establishing a new account with no spending requirements will be taxable. However, rewards with purchase restrictions are more likely to be non-taxable rebates.

How are debit and credit card rewards taxed?

Either your debit or credit card rewards will be regarded a taxable event if you cash them in. You may incur capital gains if the value of your benefits has changed because to fluctuations in the cost of cryptocurrencies after you initially received them.