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David and Manuel Cáceres del Castillo each started using a crypto debit card last year, intrigued by the new technology and inspired by their native country of El Salvador becoming the first country to accept Bitcoin as legal tender.
The brothers are two of a growing number of people using crypto rewards cards: Visa recently shared that $2.5 billion in payments were made by customers using crypto-linked Visa cards in the company’s fiscal first quarter of the year.
“Crypto rewards card” is an umbrella term that could refer to crypto credit cards or prepaid crypto debit cards. David and Manuel opted for the Crypto.com Visa Card, a prepaid crypto debit card that links to your bank account and earns rewards on your purchases.
David and Manuel Cáceres del Castillo started using crypto debit cards last year to earn crypto rewards on purchases they were already planning to make.Courtesy of David and Manuel Cáceres del Castillo
The Cáceres brothers had learned about crypto investing from YouTube influencers and a friend who followed crypto more closely. But knowing how volatile crypto can be, they didn’t want to jump into the deep end right away. “All the YouTubers out there say they are not financial advisors, and they say don’t sell your house to put money into crypto,” David says.
So they opted for a crypto debit card as a lower-stakes first step toward crypto investing. This approach let them take part in this new investment but without derailing other financial priorities. The Crypto.com card lets users earn 1$ to 8% back in crypto rewards, which is similar to some of the best cash back cards available.
“For any normal working person like me or Manuel, it’s just like a benefit. It’s a process of little by little,” David says. “When you are not sure, you should go step by step.”
While crypto rewards cards offer a way to get rewarded on everyday purchases with crypto, it’s important to know just how you want crypto to fit into your overall financial plan first. And opting for a crypto rewards card means skipping on a cash back credit card that rewards you in straight cash, which you can use for travel, big purchases, or even crypto. Free crypto is also still highly volatile, so consider how and whether it makes sense as an investment.
Here’s what you should know before signing up for a crypto debit card, as well as some firsthand tips from Manuel and David Cáceres del Castillo.
How Do Crypto Debit Cards Work?
Crypto debit cards offer crypto rewards on everyday purchases made with the card. Unlike crypto credit cards, prepaid crypto debit cards like the Crypto.com card and other Visa debit cards from popular exchanges like Binance and CoinBase don’t require a credit check. In addition to earning free crypto, these cards are designed to make it easier to spend your crypto on everyday purchases (though there are good reasons you should probably refrain from buying things with crypto).
To sign up, you need to first make sure the card is legal in your locality. New York, for instance, requires all virtual currency platforms to acquire a BitLicense before operating in the state. A product may be legal just hours away over state lines, but not in the state where you live. When you apply for your crypto debit card, you’ll be required to enter your address, which will help determine your eligibility.
Second, you’ll need to link a bank account to transfer money to and from the card. You’ll be transferring U.S. dollars from your bank account onto the card’s corresponding crypto exchange, then loading crypto onto your card. You’ll need to think wisely about which coin to use, taking into consideration transaction fees and the volatility of the coin you want to use.
In this step, Manuel, who lives outside Baltimore, and David, who lives in Helsinki, Finland, opt to fill their cards with stablecoins, which are pegged to the value of a fiat currency such as the U.S. dollar. Examples of stablecoins include USD Coin (USDC), Tether (USDT), True AUD (TAUD) — pegged to the Australian dollar — and more.
“If you want to use your card daily, you will use stablecoins,” David says. Doing so helps you stick to a regular budget, because other cryptos are so volatile it’s nearly impossible to know how much you’ll need of each currency ahead of time. (Hence why it’s usually not advisable to pay your mortgage with Bitcoin.)
Once you’ve chosen a stablecoin, you can set your card up for automatic recurring transfers from your bank. This method works well for people with regular paychecks and predictable monthly bills that you know accept debit cards as a form of payment.
The Cáceres brothers pay their groceries, electric, and water bills with their Crypto.com cards. Other bills like mortgages and car payments won’t always accept debit cards without an additional transaction fee and therefore might not be worth it in the long run.
“I get my salary in my bank account like normal,” David says. “And then I move every month our calculated budget for things like housing, groceries, for example.” David says he spends about $600 on monthly groceries. “So I buy $600 in USDC stablecoins straightaway. From there, I move it to the card.”
What Are the Risks of Using a Crypto Debit Card?
Crypto scams and theft are running rampant right now, due to a combination of crypto’s novelty, the increasing amounts of cryptocurrency circulating throughout the world, and the new infrastructure upon which the systems are built. It’s a prime environment for what William Quigley, one of Tether’s original co-founders and co-founder of the Wax blockchain, calls “Olympic-level scammers” to test their skills and get away with all the new money being circulated in the crypto market. Scammers stole over $14 billion in crypto last year.
Make sure to thoroughly check out your crypto card’s insurance policy in case of hacks. Also, use a card that lets you transact in stablecoins for more predictable monthly transfers.
Even Crypto.com, a mainstream crypto exchange, recently got hacked and lost an estimated $30 million. The breach exposed 483 digital wallets, but the company claims no customer funds were lost. The incident, however, exemplifies why investors with a lot of crypto should always use good digital wallet hygiene (no sharing security phrases or passwords), backup large amounts of crypto using cold storage, and inquire about the insurance policy for any crypto debit card or credit card before opening one.
Traditional banks, in comparison, have FDIC insurance to cover losses if your bank goes out of business. Unknown to many is that FDIC insurance doesn’t cover loss or theft; that protection usually comes down to the bank’s individual insurance policies. Banks are covered under federal policy to cover customers in the event of fraud, but the responsibility is on the customer to report errors in a timely fashion.
Similarly, you should know the ins and outs of any protection or insurance coverage you receive with a crypto debit card, and what responsibilities rest on you.
What Are the Benefits of Using a Crypto Debit Card?
The benefits of using a crypto debit card are ever-changing and evolving. On a basic level, customers can earn crypto rewards on their everyday spending. The Crypto.com card, for instance, offers a fleet of tiered rewards cards that give back at rates ranging from 1% to 8%.
To qualify for higher rewards percentages, you have to be willing to buy the company’s native cryptocurrency, CRO, and keep it on the Crypto.com wallet app for at least six months. This process is called “staking,” and it allows for more circulation and increases demand for the currency, therefore increasing the value of the blockchain ecosystem. The longer and higher amounts you stake, the more rewards you get.
“The lowest is 1% cashback, then the next levels go up and up and up,” David says. At the highest tiers, users can even benefit from free Spotify, Amazon Prime, and Netflix subscriptions along with discounts on Airbnb and other purchases.
Something to keep in mind: Altcoins can be even more volatile and unreliable than Bitcoin or Ethereum, so it’s even more important not to buy more than you can afford to lose in the event the coin ultimately loses all its value.
Do You Have to Pay Taxes on Crypto Earned With a Crypto Debit Card?
Yes, you’ll need to record the value of the crypto you earned in U.S. dollars and report that income on your tax return.
Centralized crypto exchanges like Kraken, Gemini, and Binance do currently report trading activity to the IRS, though it hasn’t always been that way, according to Lisa Bragança, former SEC branch chief and investment attorney. There are not consistent requirements as to what exchanges must report yet. Regulators likely want to increase tax reporting responsibilities for any crypto platform where decentralized finance (DeFi) activity takes place, and that would include activities like staking (holding) crypto on a rewards card in exchange for monetary benefits.
And Bragança thinks the exchanges will comply: “As these exchanges are seeking to get more authority, they are seeking that kind of legitimacy.”
Bottom Line: Are Prepaid Crypto Cards Worth It?
Every crypto debit card works differently, and each has its own rewards structure. Research thoroughly before signing up. Consider processing fees (just as you would a debit card). Ask yourself whether the rewards suit your lifestyle.
If, like the Cáceres brothers, you are still interested in earning and learning about crypto via paying bills with a prepaid card, remember to take it slow. Cover the necessities in your household budget, tending first to your long-term investments, housing payments, and emergency fund.
After that, a crypto rewards card can be an accessible way to familiarize yourself with decentralized finance while earning rewards.