Cryptocurrencies are one of the most attractive assets for investors right now. While financial and regulatory authorities have warned individuals against holding cryptocurrencies or related assets, that has not stopped a rapidly evolving financial services industry from developing in the decentralised finance and crypto space. One of these services is the emergence of cryptocurrency credit cards.

What are crypto credit cards?

Cryptocurrency credit cards are not too dissimilar from traditional credit cards. They allow individuals to purchase items by borrowing the money from the card issuer and then paying the amount back with interest at a later time.

Just like traditional credit cards, cryptocurrency credit cards also offer rewards. But here is where the cryptocurrency connection comes in, the credit card issuer gives the rewards in the form of cryptocurrency tokens.

How do crypto credit cards work?

When you make a transaction, the card issuer will, on your behalf, make the payment. Like traditional credit cards, you are required to pay the amount you spend with interest at the end of the month.

The issuers do not make payment in cryptos, rather convert the cryptos you own into fiat currency and then make the payment on your behalf. However, some cards allow users to pay for their purchases using the cryptocurrency deposited in their accounts. These cards are in both, physical and digital form.

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Credit card rewards

Depending upon the issuer, this can be directly deposited in the account of the customer after every transaction or rewarded back at the end of the month. The cryptocurrency awarded differs from card to card.

Crypto debit cards

Along with credit cards, cryptocurrency debit cards exist as well. Such cards allow users to directly pay for purchases using cryptos, though the number of places that accept such cards is currently rare.

Cryptocurrency cards are currently issued by Gemini, SoFi, BlockFi, Brex, Venmo and others.

Hidden costs

While cryptocurrency credit cards allow users to earn rewards in the form of tokens, it creates a new tax obligation as well. Since selling cryptocurrency under most legislations attracts capital gains tax, selling cryptos individuals earn from credit card rewards means they’re on the hook to pay the associated taxes as well.

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"The regulatory grey area still poses a huge problem on these credit cards," Edul Patel, co-founder of Mudrex said. "The process of converting the cryptocurrencies associated with the person’s account into fiat currency essentially means selling some crypto and getting fiat currency. Since the underlying is being sold and converted into fiat currency, it would come under the purview of capital gains. As per the current scenario of crypto taxation, most jurisdictions place a 30 percent tax on cryptocurrency gains," he said.

The legal grey area also means the future legality of such cards is also under question in many jurisdictions and countries.

Just like all other financial instruments for borrowing, users should be careful to not go too deep into debt that they cannot afford to pay off. Not paying your credit card bills, even if they are cryptocurrency credit cards, can lead to additional penalties and have an adverse impact on credit scores.

"A view exists where the frequency of trading transactions is higher and cryptocurrency is held not as an investment, the gains could be classified as business income/income from other sources," Jitendra Suvagia, Partner at Bhuta Shah & CO LLP said.

The issue, Suvagia said, could be further compounded in the case of crypto cards. "Routine purchases can be construed as a sale of cryptocurrency and hence, subject to any taxation. In such a case, the valuation rules would come into play to determine the gains, if any," he added.

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(Edited by : Yashi Gupta)

First Published:Dec 21, 2021 7:31 AM IST