Insights from FinTech
Last year, the cryptocurrency exchange Coinbase
The exchange said users can earn up to 4% in crypto-related rewards—including 1% back in Bitcoin or 4% back in Stellar
The use of crypto for retail is growing
Study from Pymnts, US Crypto Consumer: Use of Cryptocurrency in Online and In-Store Purchasesfound that 30% of cryptocurrency holders had purchased something online using cryptocurrency, and 21% had done so in a store, in the month preceding the survey.
Pymnts noted that the large percentage of crypto holders who use cryptocurrencies in stores could “suggest that Mastercard use
However, the survey says otherwise:
“Among online shoppers 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 cryptocurrency holders made their cryptocurrency-based retail purchases, the study concluded that:
“The interest in using cryptocurrency to pay for purchases is a reality. There is untapped potential for cryptocurrency holders to use them to make purchases instead of using more traditional payment alternatives.”
Still crazy after all these fees
Ok, consumers want for retail purchases using your crypto holdings. But doing so with a Coinbase debit card presents issues and concerns that many people will struggle to navigate.
Last year I noticed 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 need to consider a number of factors, including taxes, transaction fees, rewards, returns and merchant categories accepted.”
The good news for potential users of the Coinbase debit card is that the company has made some improvements to the card in terms of:
- Transaction fees. Coinbase has removed the 2.49% transaction fee.
- Prizes. The crypto exchange has revamped its rewards program, giving cardholders the chance to earn up to 4% back on purchases that will go into a rotating pool of crypto assets like Bitcoin or The Graph
(GRT). If the customer does not select a prize when the next rotation starts, they will automatically receive the prize with the highest crypto return rate.
- Financing. Coinbase offers customers the ability to deposit part or all of their paycheck on Coinbase with no direct deposit fees, allowing them to receive their paycheck in cryptocurrency and spend it fee-free.
The changes in the program are a good step forward, but not…and probably never could— solving the big cryptocurrency payment pitfall: tax implications.
The downside of crypto payments
The tax implications of paying with cryptocurrencies with a Coinbase debit card are (and should be) a deal killer for many consumers. According to the Coinbase website:
“The IRS classifies cryptocurrency as ‘property’ for tax purposes. This means that every time you use your card and sell cryptocurrency, you will have sold assets in a taxable transaction. You will need to report gains or losses from using the card on your tax return.”
It’s easy to imagine that some users will say “I know there are tax implications – I’ll work them out.” Maybe it’s not that simple.
Tax attorney Guinevere Moore warns crypto investors of 10 crypto tax mistakes to avoid, including:
- Incorrect reporting of cryptocurrency received from transfers, forks and splits
- Using the wrong cryptocurrency transaction reporting form
- Failed to report crypto-to-crypto transactions.
Additionally, the tax implications of paying in cryptocurrency – in order to load funds onto a Coinbase debit card – are complicated. According to CoinTracking:
“If your salary is in cryptocurrency, the IRS takes into account the fair market value of the cryptocurrency in US dollars on the date of your receipt for purposes of calculating federal income and payroll taxes. If you receive cryptocurrency as a form of payment as an independent contractor, you will have to pay self-employment tax on top of your income tax. Self-employment tax is currently 15.3% in the US.”
Additional downsides to paying with a Coinbase debit card include:
- Refund. If you return a purchased item, Coinbase will place the returned amount into the USD wallet of your Coinbase account. This means that if you want to reinvest that money in Bitcoin or another cryptocurrency, you will pay a fee for that transaction.
- Choice of retailers. Coinbase says you can buy cryptocurrencies anywhere Visa is accepted. Not really. Crypto purchases are prohibited on a long list of merchant categories, including casino betting/gambling, internet gambling, online gambling, or horse and dog racing gambling—wThis is ironic considering that investing in crypto is gambling in itself.
Point: Coinbase has made it more convenient to use your debit card to use cryptocurrency for retail purchases, but it’s probably not worth the effort.
Whether intentional or not, current tax laws discourage the use of cryptocurrencies for everyday retail purchases. That’s good news for banks that issue debit and credit cards and earn interchange fees from transactions on those cards.
Changes to cryptocurrency tax laws – and the loosening of transaction disincentives such as dollar and merchant restrictions – could have a negative effect on banks’ fee income.
I wouldn’t be surprised if the bank lobby is working to keep the cryptocurrency tax laws in place. You know they are accountants.