Considering a cryptocurrency debit card? This blog post covers how crypto debit cards work, how they differ from traditional debit cards, and four factors to consider when choosing your crypto debit card.
As cryptocurrency explodes in popularity it’s clear we are in the dawn of a new financial age.
Early crypto adopters touted the digital currency as the beginning of the significant shift from the traditional form and structure of finance to a completely decentralized one. Essentially, the early adopters correctly predicted that crypto would become as legitimate as traditional fiat currency. What they may not have predicted was the move towards legitimizing crypto using traditional financial products.
Recent developments highlight the resilience of legacy finance. Of all the big things happening at the interface between crypto-verse and traditional finance, cryptocurrency-funded debit cards are one of the most exciting. Crypto debit cards are changing the game, but how? Read on to find out.
What is a crypto debit card?
While most of us know what a debit card is, it’s still worth defining as a crypto debit card is based on the same premise. A debit card is a plastic card with your relevant account information embedded into the card via a chip or scannable barcode. Unlike a credit card, a debit card allows you to electronically pay for goods or services with the money in the attached account.
In essence, a debit card connects processing companies with your checking account, allowing merchants to process payments using the funds in your account.
As for a crypto debit card, well—it’s exactly what it sounds like. A crypto debit card connects a cryptocurrency payment processing company with your crypto wallet.
This type of card enables you to settle transactions at any merchant that accepts debit cards using the funds in your crypto wallet.
A big difference between a crypto debit card and a traditional debit card: a crypto debit card automatically converts the crypto you’ll be spending into the preferred fiat currency.
How do crypto debit cards work?
So, now that we’ve touched on the basics of crypto debit cards, let’s explore how they work in more detail.
For starters, using cryptocurrency in the real world today still has its limitations. You can’t walk into any shop and pay for your order with Bitcoin as most merchants are unwilling to accept the crypto.
Retailers are cautious about digital currencies for several reasons, including uncertain legal status for payment processors, exchange rate volatility, and a still-underdeveloped understanding of blockchain–the cryptocurrencies powering technology–for most of the general public.
Thankfully, crypto debit cards and other “traditional” financial products seek to further legitimize cryptocurrency as valid forms of payment. How do they do this? Here’s an example:
John walks into a local coffee shop that, like most, accepts debit cards. Because a Bitcoin debit card works just like the one you get from your local bank, John has the choice to use his regular debit card or the brand new crypto-based debit card.
John decides to give his crypto debit card a test run. While the coffee shop does not accept cryptocurrency, it certainly takes debit payments. The cashier hands John his cup of coffee, swipes the card and hands him his receipt.
When the cashier swiped the card, the processing company reached into the card’s crypto wallet and took the dollar amount of crypto needed for the cup of coffee. The processing company then converted the crypto into regular fiat currency and delivered it directly into the coffee shop’s account. This all happened in a manner of seconds, and highlights one more way that crypto is becoming a more accessible form of payment in the real world.
4 things to consider when using a crypto debit card
If you’re interested in having a crypto debit card, here are some tips, tricks and best practices to take into consideration when searching for the right one.
Number 1: Is the service available in your location?
Cryptocurrency adoption is higher today than ever before. But globally, some jurisdictions are moving in the opposite direction. Recent reports indicate that cryptocurrencies might be becoming contraband in some places with full bans in places like Turkey, China, and India soon, while countries like the U.S. are mulling a national digital currency and allowing trading, buying and selling of crypto coins.
As such, you should be aware that while the crypto debit card should work at any POS that accepts debit cards, they might not be so helpful in crypto-hostile jurisdictions, so having a backup plan is always important.
Number 2: Do you have to pay tax on your crypto debit card transactions?
Yes! The Internal Revenue Service (IRS) considers cryptocurrency as property—capital assets, to be specific. Bitcoin and other cryptocurrencies are a financial instrument similar to bonds and stocks in the IRS’ eyes, and is not a currency. This means that you need to report your capital gains—or losses—when using your crypto debit card to make purchases.
You should know that you owe taxes on your cryptocurrency gains when purchasing goods or services with a crypto debit card if the price of crypto is higher at the time of the purchase than when you acquired it. The amount of crypto taxes you owe depends on the period you have held the coins and the profit amount, if any. If you make purchases with your crypto debit card when your assets are in a loss position, you can actually use this capital loss to offset capital gains with a strategy called tax-loss harvesting.
Check out TaxBit’s Guide to Cryptocurrency Taxes to get started, or start your free TaxBit trial to automatically generate your tax forms and save money through tax-optimized trades year round.
Number 3: What are the supported cryptocurrencies?
In the illustration above, we saw that the crypto debit card with which John bought coffee supported Bitcoin only. Such a card only takes Bitcoin as a deposit, which the processing company will then convert into the preferred fiat currency.
It is helpful to be aware that thousands of cryptocurrencies exist today, but only a few have achieved mainstream appeal. Therefore, it may be best to select the crypto debit card that supports popular tokens, or one that supports your preferred coin. Thankfully, most crypto debit cards support multiple cryptocurrencies.
Number 4: What fees and exchange rates apply?
Different card providers charge different transaction fees. The majority of the debit card providers we surveyed do not charge deposit fees, but all charge withdrawal fees. Some card providers waive fees if you hit a certain threshold of annual crypto expenditure.
It’s also important to consider whether the provider charges for foreign conversions. Forex fees are a notorious problem in the traditional financial industry. In most cases, foreign exchange fees don’t apply, and those crypto cards that do charge forex fees mainly do it to reimburse Mastercard and Visa – the processing companies.
Crypto debit cards vs. traditional debit cards
The basic concept of crypto debit cards is similar to traditional debit cards. So, why not just use your regular card? There’s a few perks to crypto debit cards that traditional debit cards don’t offer.
For instance, many crypto debit cards do not subject users to exchange rate expenses. Cryptocurrencies are decentralized currencies rather than separate currencies on the opposite side of the market. As such, converting Bitcoin into US dollars is not different from converting the tokens into Russian rubles, and you have the same amount of money no matter what your geographic location is.
Additionally, you don’t need a bank account to use a crypto debit card, although you do need an account at an exchange or wallet. As such, such cards make online purchases faster and more convenient.
Pros and cons of crypto debit cards
Pros:
- Ability to spend cryptocurrency like fiat currency
- Reduced or waived foreign conversion fees
- Generally multi-currency allows diversified spending
- Some cards offer significant cash-back rewards in crypto
- ATM withdrawal fees can be waived by some issuers
Cons:
- Spending cryptocurrency triggers a taxable event
- Some geographical restrictions apply
- You must have balance in your wallet to spend
Bridging the gap between traditional finance and cryptocurrency
It is just over a decade since bitcoin was first introduced. The fact that you can use a bitcoin/cryptocurrency connected debit card today is amazing. Be sure to do your own research before opting for services such as cryptocurrency debit cards.
Frequently asked questions
Q. Can a crypto debit card replace my normal debit card?
It depends. Generally speaking, yes. If you hold value in crypto and want to spend crypto as your main source of funds, then yes. Most crypto debit cards are issued by traditional networks like Mastercard or Visa and are accepted anywhere those cards are accepted.
Q. Does it cost money to use a crypto debit card?
It depends on the nature of the transaction. While there are generally no additional fees charged for using your debit card, you will incur fees for selling your crypto when you spend it. Additionally, there may be fees when you withdraw funds from an ATM.
Guest Post by Ruchi Gupta, Benzinga Contributor: The views and positions expressed within guest posts are those of the author and do not represent those of TaxBit. The completeness and validity of any statements made within guest articles is not guaranteed.
