OBSERVATIONS FROM THE FINTECH SNARK TANK
Last year, cryptocurrency exchange Coinbase announced that Coinbase debit card holders could make retail purchases with their Bitcoin, Ethereum, or Dogecoin holdings by linking the card to Apple Pay and Google Pay.
The exchange said that users could earn up to 4% in crypto-related rewards—including 1% back in Bitcoin or 4% back in Stellar Lumens—using the Coinbase debit card.
Crypto’s Use for Retail Purchases Is Growing
A study from Pymnts, The US Crypto Consumer: Cryptocurrency Use in Online and In-Store Purchases, found that 30% of crypto owners bought something online using a cryptocurrency, and 21% did so in-store, in the month leading up to the survey.
Pymnts noted that the large percentage of crypto holders using crypto in-store could “suggest that the use of Mastercard- and Visa-branded crypto debit and prepaid cards, along with payments companies like CashApp and PayPal, is growing.”
The survey says otherwise, however:
“Amongst online purchasers using crypto, 70% used digital wallets while 54% used debit or prepaid cards. For in-store purchases, 74% used digital wallets while 66% used debit or prepaid cards.”
Regardless of how crypto owners made their crypto-based retail purchase, the study concluded that:
“Interest in using cryptocurrency to pay for purchases is a reality. There is untapped potential for crypto owners to use it to make purchases instead of using more traditional payment alternatives.”
Still Crazy After All These Fees
Ok, so consumers want to make retail purchases using their crypto holdings. But doing it with the Coinbase debit card presents issues and concerns that many people will find hard to navigate.
Last year I noted that you’d have to be crazy to make a retail purchase using your bitcoin, ethereum, dogecoin—or any cryptocurrency—with a Coinbase debit card:
“You’ll have to take a number of factors into consideration, including taxes, transaction fees, rewards, refunds, and accepted merchant categories.”
The good news for would-be Coinbase debit card users is that the company has made some improvements to the card regarding:
- Transaction fees. Coinbase eliminated the 2.49% transaction fee.
- Rewards. The crypto exchange revamped its reward program, giving cardholders an opportunity to earn up to 4% back on purchases which will go into a rotating set of crypto assets like Bitcoin or The Graph (GRT). If a customer doesn’t select a reward when the next rotation is launched, they’ll automatically get the reward with the highest crypto-back rate.
- Funding. Coinbase is offering customers the ability to have some or all of their paycheck deposited into Coinbase with no fees on direct deposits, enabling them to receive their paycheck in crypto and spend it without fees.
The changes to the program are a good step forward, but they don’t—and probably could never—address a big pitfall to paying with crypto: The tax implications.
The Downside of Paying With Crypto
The tax implications to paying with cryptocurrencies through a Coinbase debit card is (and should be) a deal killer for many consumers. According to Coinbase’s website:
“The IRS classifies cryptocurrency as ‘property’ for tax purposes. This means that each time you use your card and sell cryptocurrency, you will be have sold property in a taxable transaction. You will be required to report gains or losses from your use of the card on your tax return.”
It’s easy to imagine that some users will say “I know there are tax implications—I’ll deal with them.” It may not be that simple.
Tax attorney Guinevere Moore warns crypto investors of 10 crypto tax mistakes to avoid including: 1) Improperly reporting cryptocurrency received from air-drops, forks, and splits; 2) Using the wrong form to report cryptocurrency transactions; and 3) Failing to report crypto-to-crypto transactions.
In addition, the tax implications of getting paid in crypto—in order to load funds onto a Coinbase debit card—are complicated. According to CoinTracking:
“If your salary is in crypto, the IRS considers the fair market value of crypto in US dollars at the date of your receipt for federal income tax and payroll tax calculation purposes. If you receive crypto as a form of payment as an independent contractor, you’ll have to pay a self-employment tax on top of your income tax. Currently, self-employment tax is at 15.3% in the US.”
Additional negatives to paying with the Coinbase Debit card include:
- Refunds. If you return a purchased item, Coinbase will put the refunded amount in the USD wallet of your Coinbase account. This means that if you want to reinvest that money in Bitcoin or some other cryptocurrency, you’ll pay a fee for that transaction.
- Choice of merchants. Coinbase says you can make crypto purchases anywhere that accepts Visa. Not quite. Crypto purchases are prohibited at a long list of merchant categories, including betting/casino gambling, internet gambling, online gambling, or gambling on dog and horse races—which is ironic considering crypto investing is a gambling activity itself.
Bottom line: Coinbase has made it more convenient to use its debit card to use crypto to make retail purchases, but it’s probably not worth the effort.
Whether it’s intentional or not, current tax laws discourage the use of cryptocurrencies to make everyday retail purchases. That’s good news for banks who issue debit cards and credit cards and earn interchange fees from the transactions on those cards.
Changes to the crypto tax laws—and loosening of transaction deterrents like dollar limits and merchant restrictions—might have a negative impact on banks’ fee revenue.
I wouldn’t be surprised if the bank lobby is working to keep the crypto tax laws in place. You know the accountants are.