Crypto debit and credit card rewards, such as cashback in cryptocurrency, are generally not considered taxable income upon receipt by the Internal Revenue Service (IRS). This position aligns with the long-standing treatment of traditional credit card rewards, which are viewed as a rebate or adjustment to the purchase price, rather than earned income. According to a tweet by tax expert Shehan, "Rewards received from crypto debit/credit cards are not taxable. This is because cash/crypto back is considered not income. It's an adjustment to the purchase price."
While the IRS has not issued specific guidance solely for cryptocurrency rewards, tax professionals and financial experts widely apply existing precedents for credit card rewards. These rewards, earned through qualifying purchases, are treated as a reduction in the cost of the goods or services acquired. This interpretation means that users typically do not incur a tax liability at the moment they receive these crypto-back benefits.
However, a critical distinction arises when these crypto rewards are later disposed of. If a user sells, trades, or spends the cryptocurrency earned as a reward, this action triggers a taxable event. Any appreciation in the value of the cryptocurrency from the time it was received (its cost basis) to the time of disposal will be subject to capital gains tax. Conversely, a decrease in value could result in a capital loss.
It is important to note that certain types of rewards may be treated differently. Sign-up bonuses offered by crypto card issuers that do not require any purchase or spending to be earned can be considered taxable income. In such cases, the issuer might be required to report the value of the bonus to the IRS. Users are advised to maintain meticulous records of their crypto reward receipts and subsequent transactions to accurately calculate any potential capital gains or losses.