Crypto might have exploded into the public consciousness as a highly volatile speculative asset, but the industry wants to make it into something far more ubiquitous.
Now the first green shoots of its evolution are sprouting, with features like staking allowing users to earn above-market interest on their holdings.
But the ability to spend cryptocurrency as easily as you might the bank notes in your wallet has been seen by many as the big next step . Allowing investors to immediately transact with their profits could arguably close one of the last significant gaps between decentralised currency and fiat currency.
To that end, Australia is beginning to see the arrival of sleek crypto cards which promise to allow users to seamlessly spend their coins including Bitcoin, which again crossed the $US50,000 threshold this week.
On Tuesday, Cryptospend announced it would launch a Visa card from September. Cryptocurrency exchange Coinjar already has a Mastercard one, while global app Crypto.com runs a loyalty spending program in Australia on top of its own version. Local startups like Coinstash, meanwhile, have more product in the works.
The true cost of spending crypto
Yet despite a wave of these products coming to market, there’s one major issue that isn’t being made apparent to the public.
Under the glossy marketing, is an assumption consumers understand they might pay over and above the retail price for anything they buy with them.
Why? Because every transaction has to be logged with the Australian Tax Office (ATO) and is most likely subject to capital gains tax (CGT).
“For tax purposes, crypto-to-fiat debit cards are treated the same as any other cryptocurrency transaction. At the point of sale, the cryptocurrency is converted into Australian dollars, which triggers a CGT event,” an ATO spokesperson told Business Insider Australia.
Yet of all the products that Business Insider Australia examined, only one – Crypto.com – acknowledged on their website the fact that users could be taxed on any and all purchases they make using the card.
How crypto cards work
The premise of these cards is fairly simple: customers use their card at the checkout as they would a debit or credit card. Most commonly, the exchange between crypto and fiat is initiated at the point of sale, or when you tap the card, transferring crypto holdings out of your wallet and Australian dollars into the merchant’s bank account.
Say Christine is buying a $5,000 watch. The exchange receives a request for 5,000 Australian dollars from Cartier and it typically initiates the sale of $5,000 worth of cryptocurrency holdings, based on her predetermined preference, paying for the watch with the proceeds.
It might also sell a little more to cover a transaction fee. In the case of Coinjar, that’s 1% – or $50 in our example. Each product is upfront with these fees, and our shopper walks away with a luxury watch on her wrist and $5,050 less in her pocket.
But shoppers would be forgiven for not knowing that the $50 fee might be the least of their worries. To explain, let’s go back to our example in which Christine was buying a timepiece.
Back in December, eight before she ever stepped into the Cartier store, Christine bought Bitcoin at $25,000. Fast forward to July, and she bought her watch when Bitcoin was trading at $50,000. Her $5,000 watch at the time cost her 0.1 Bitcoin plus transaction fees.
The ATO doesn’t care about her fancy new watch but it does care that Christine made a profit, selling her Bitcoin for $2,500 more than she bought it for as she waits for the shop assistant to box up her bling.
No matter how they dispose of it, Australians are typically obliged to pay CGT if they sell a coin for more than they bought it for. For most people, this is paid at the equivalent of their marginal income tax rate.
In our example, Christine bought it less than 12 months ago so she’s not eligible for the 50% CGT discount and the ATO requires her to pay income tax on her $2,500 profit. Earning $80,000 a year, Christine would be required to pay 32.5% in tax, or the equivalent of $812.50 come the end of the financial year.
On July 1 2022 comes around and Christine may be shocked to find out that the $2,500 watch she bought back in August actually cost her around $3,362.50, after taxes and fees.
‘Ticking tax timebomb’
Effectively Christine would have paid nearly the same amount had she sold her Bitcoin first, transferred it to fiat and then paid with her regular debit card.
But the real danger of the card is that it obscures that responsibility for users according to Mark Chapman, H&R Block director of communications.
“Cryptocurrency debit cards come with a ticking tax bomb,” Chapman told Business Insider Australia. “Taxpayers need to be aware of this before signing up for one of these cards or be prepared for a nasty tax surprise down the line.”
The ATO hastens to add that after 12 months of transactions, making heads or tails of what you might actually owe might be significantly more difficult regardless of whether the assets have appreciated or not.
“People should keep accurate records including dates of transactions, the value in Australian dollars at the time of the transactions, what the transactions were for, and who the other party was, even if it’s just their wallet address,” the ATO spokesperson said. “It’s best to keep records as you go, saving copies of receipts and using spreadsheets or crypto accounting software.”
Indeed, that is why Crypto.com makes users sell their assets manually before allowing them to spend the profits.
“The whole point of having that friction is to create a conscious decision by the investor to liquidate the asset that they want to liquidate based on their tax obligations and financial circumstances,” Asia Pacific general manager Karl Mohan told Business Insider Australia.
Mohan says the product also has a built-in tax tool to help users keep on top of their obligations – as does Coinjar’s – but that “the onus is on you as an investor”.
It puts platforms in an interesting predicament, at once trying to offer innovative ways to use crypto while complying with sometimes outdated or absent legislation.
“There’s no denying that CGT considerations certainly complicate the appeal and growth of this emerging product class. Despite this, we do our best to make the related administrative obligations as simple and painless as possible,” Coinjar CMO Dominic Gluchowski said told Business Insider Australia, adding that users are given sophisticated EOFY statements to guide them.
Yet regardless of the potential complexity of card products, there is clearly an appetite for them.
“Despite the rules being as they are, tens of thousands of Australian customers have been using CoinJar Swipe since 2015,” Gluchowski added, referencing the company’s longstanding prepaid card option.
“As products like CoinJar Card start giving people the ability to use crypto in their everyday lives, we’re hopeful that there’ll be a renewed focus on the features and differences of this new and idiosyncratic asset class.”
Right now, though the cohort involved in designing them say the next generation of financial products are still valuable.
“This is just a more convenient way of selling it really, regardless of which way you go about it,” Cryptospend CEO Andrew Grech told Business Insider Australia.
“Not only are we making it easier for people, but we’re giving them more ways to actually use these digital assets in everyday life.”