Coinbase is the most recent major cryptocurrency exchange to offer a Visa® debit card. The Coinbase debit card offers a percentage of your purchase as a “cash-back” reward in the cryptocurrencies of your choice—up to 4%.
While receiving a percentage of your purchases back in crypto sounds like a great opportunity on its face, it is likely to create a tax headache for those who choose to use the Coinbase Card. Plus, making purchases with cryptocurrency triggers tax reporting requirements and potential tax liabilities.
Let’s break down the tax implications of using the Coinbase debit card.
What is the Coinbase Debit Card?
The Coinbase debit card allows you to spend any cryptocurrency held in your Coinbase account. The Coinbase card is not a credit card, so you may only spend the assets currently held in your Coinbase portfolio.
Coinbase Card offers its customers the option to choose which currency they spend on each purchase, as well as which currency they receive as “cash-back.” Coinbase Card has no annual or sign up fees and is available for eligible Coinbase customers.
Coinbase does not charge a fee to spend US dollars or USDC, but does charge a 2.49% fee on every purchase made using other cryptocurrencies.
Are the Coinbase Card “cash-back” rewards considered income?
Coinbase Card offers “cash-back” rewards (really cryptocurrency rewards) for purchases. Are these rewards considered taxable income?
The IRS hasn’t issued direct guidance regarding debit card rewards paid out in cryptocurrency, but based on the existing direction and opinions, the IRS is likely to consider the “cash-back” rewards as non-taxable “rebates.” The IRS has previously used this treatment for traditional cash-back rewards, points, and airline miles earned through credit cards.
These rewards are considered an “after-the-fact” discount applied to the underlying purchase.
However, the IRS may take a different position in specific instances when customers abuse a rewards program and attempt to generate tax-free wealth in the form of cash-back rebates.
It’s important to report your “cash-back” rewards from Coinbase on your tax return in order to support their non-taxable status and avoid problems with the IRS.
Are purchases made with the Coinbase debit card taxable transactions?
Yes, nearly all purchases made using the Coinbase debit card are taxable transactions. When you make a purchase using the Coinbase Card, Coinbase is converting a crypto asset to USD, creating a disposition of property. The disposition of property triggers a capital gain or loss on every purchase regardless of which asset you spend, creating a taxable transaction.
If I use a stablecoin like USDC for purchases, is it taxable?
Coinbase debit card purchases made with stablecoins, such as USDC, may trigger a taxable gain. Although USDC and other stablecoins are closely related in price to the USD, the value is still constantly fluctuating.
The fluctuating price can create a capital gain or loss any time the asset is spent using the Coinbase Card. These capital gains and losses acquired from stablecoins, although likely to be quite minimal on a purchase-by-purchase basis, add up over time. If you are not reporting your Coinbase debit card transactions using stablecoins to the IRS, then you are likely at risk of falsely reporting your capital gains and losses on your Form 8949.
If there was no change in the value of the stablecoin between the time you acquired it and the time you disposed of it by making a purchase, there may not be a capital gain or any tax owed. However, it’s important to report these transactions properly and prove there was no gain.
What if I move mined crypto or staking rewards into my Coinbase portfolio and use them for purchases with Coinbase Card?
These transactions are taxable. When you earn rewards through staking or mining, those earnings are taxed as income and the Fair Market Value is recorded at the time of acquisition.
If you move these mining/staking rewards from your wallet into your Coinbase portfolio and then spend them using the Coinbase debit card, the disposition of the crypto asset creates a capital gain or loss, which is taxable.
Learn more about how crypto income is taxed, both upon receipt and when it is sold, in our Cryptocurrency Tax FAQ.
Full-service cryptocurrency tax help
Have questions about the new Coinbase Card or any other cryptocurrency based credit or debit cards? Contact Gordon Law Group to speak with one of our knowledgeable cryptocurrency attorneys!