OBSERVATIONS FROM THE FINTECH SNARK TANK
Cryptocurrency exchange Coinbase announced that Coinbase debit card holders will be able to 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 that make purchases with their Coinbase debit card can earn up to 4% in crypto-related rewards, including 1% back in Bitcoin or 4% back in Stellar Lumens.
Merchants don’t get paid in cryptocurrencies, however. When Coinbase card users make a purchase, the exchange converts users’ digital assets into US dollars.
Is this going to make retail spending with cryptocurrencies more mainstream? Not a chance.
Consumers Want to Spend Their Bitcoin and Dogecoin
According to research from Cornerstone Advisors, Americans holding cryptocurrencies purchased $31.2 billion worth of retail products and services using Bitcoin and other cryptocurrencies in 2020. Coinbase users accounted for $16.8 billion—54%—of that total spend.
And there’s no sign of it slowing down: Two-thirds of Coinbase users anticipate using Bitcoin and other cryptocurrencies to make purchases over the next two years.
Retail spending with cryptocurrencies got a boost in 2020 when PayPal announced that it was granted a conditional Bitlicense by the New York State Department of Financial Services (NYDFS) which enables PayPal users to:
- Buy, hold, and sell cryptocurrency (initially Bitcoin, Ethereum, Bitcoin Cash, and Litecoin) directly within the PayPal digital wallet.
- Use the cryptocurrencies as a funding source for purchases at its 26 million merchants.
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You’ll Need a PhD in Statistics To Figure Out The Impact of Coinbase Debit Card Spending
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.
You’ll have to take a number of factors into consideration, including taxes, transaction fees, rewards, refunds, and accepted merchant categories.
First—and foremost—are the tax implications. 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.
But maybe you want to make a big ticket transaction, and you’ve calculated that it’s worth taking the tax hit and finance your purchase by cashing in some of your Bitcoin, Ethereum, Dogecoin, or other cryptocurrency.
If you do, you’ll have to pay a 2.49% transaction fee because Coinbase sells users’ cryptocurrency each time they make a purchase, triggering the fee.
You’ll get some of that transaction fee back in the form of rewards, however. If you pay in Bitcoin and get the 1% Bitcoin reward, the effective rate of the transaction fee is only 1.49%.
That assumes the exchange rate on Bitcoin is the same when the reward pays out as it was at the time of the transaction.
Rewards aren’t paid out immediately—there can be a lag of up to a couple of days. If the price of Bitcoin drops in those intervening days, the value of your reward has diminished.
If you consider taking the reward in Stellar Lumens you’ll have a whole other set of calculations to make involving the valuation of the cryptocurrency at the time of the transaction.
If you return the 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 another 2.49% transaction fee, and you’ll lose any rewards earned on the original transaction.
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.
No More Bitcoin Pizza Days
Legend has it that on May 22, 2010—now known as Bitcoin Pizza Day—Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two pizzas from a Papa John’s. Based on the recent price of Bitcoin, those pizzas cost more than $355 million.
We’ll never see another Bitcoin Pizza Day—even if the cost of Bitcoin drops to $1. Converting Bitcoin into an acceptable form of payment would trigger a taxable event and require a transaction fee that tacks on about half of what the local sales tax is in many states.
Coinbase has made it more convenient for its users to spend their cryptocurrencies for regular, everyday retail purchases, but you’d have to be certifiably crazy to do it.
It’s easy to imagine that someone looking to buy a new car—or even a house—would want to cash in some of their crypto profits to pay for it. But with a $2,500 daily limit on Coinbase debit card transactions, Coinbase users will to have to do it the old-fashioned way: Convert the crypto to cash, and transfer the cash to a checking account.
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.