In 2022, Bitcoin turned 13 years old. In the span of a little more than a decade, the cryptocurrency went from being virtually unknown to a household name. Major companies such as Amazon, PayPal, Starbucks, Microsoft and many others now allow customers to pay in bitcoin. This has led many bitcoin holders to take the next step in adopting the cryptocurrency: by purchasing real estate.
In theory, it is possible to purchase real estate with bitcoin. However, the real estate market is not yet set up to conduct transactions in bitcoin. So, if you want to buy real estate with bitcoin, it’s going to require putting in a little extra legwork. Below are a few things that you should consider before deciding to buy your next home or rental property with bitcoin.
Can You Find a Seller Who Accepts Bitcoin?
For many people, real estate is their most valuable asset. Thus, the first hurdle to overcome when trying to use bitcoin to purchase real estate is finding a seller who accepts the cryptocurrency. While many people are interested in investing some of their savings in bitcoin, the volatility and lack of regulation surrounding cryptocurrency, in general, is enough to make most sellers uncomfortable with the idea. However, there are sellers who will accept bitcoin; it’s just a matter of finding them. To do so, you are probably better off searching online forums rather than picking up the phone and calling your local realtor.
Who Will Handle the Transaction?
The real estate industry may not want to admit it, but it’s not the most technologically advanced industry. Real estate transactions, even all-cash transactions, require title companies and/or escrow companies, depending on where you live. In short, a title company verifies that the seller has the legal right to sell the property. The escrow company holds the buyer’s funds until the time of the transaction and then releases them to the seller.
When using bitcoin to purchase real estate, it may be difficult to find a title or escrow company willing to facilitate the transaction. For example, an escrow company holding cash faces very little risk, as the value of the cash in the escrow account is not likely to change during the closing period. However, requesting that a company hold bitcoin in escrow is a much bigger risk. What happens if the value of bitcoin tanks (or skyrockets) between the acceptance of the buyer’s offer and the closing date? Thus, finding an escrow company willing to handle a bitcoin-financed real estate transaction is tough—and if you do, you should probably expect to pay quite a bit more for their services.
Of course, there is a chance you can find a seller who is willing to waive the escrow requirement, especially if you are able to pledge cash or assets as collateral.
Will You Need to Cash Out Your Bitcoin to Appease a Seller?
In a true bitcoin-financed real estate transaction, the buyer pays the seller with bitcoin directly. However, in most bitcoin real estate sales, the buyer converts their bitcoin to cash before the transaction takes place and provides the seller with cash. From the buyer’s perspective, these are very similar; in both cases, the buyer uses bitcoin to purchase real estate. Of course, from the seller’s perspective, these are very different transactions. In the event the seller wants cash in hand at the time of closing, you are going to need to convert your bitcoin into cash, which means you will likely incur transaction fees.
What Are the Tax Implications of the Transaction?
Regardless of whether you sell your bitcoin to buy real estate or pay with bitcoin directly, the IRS wants to know about the transaction. This is because, according to the IRS, bitcoin and other cryptocurrencies are considered “property” under the tax code, much like stocks. So, if you bought low and plan on buying real estate with your bitcoin gains, don’t expect to avoid paying income tax on your gains.
Because cryptocurrency is considered property, the effective tax rate on your cryptocurrency gains depends, in part, on how long you hold it. Cryptocurrency transactions are either taxed as either short-term or long-term gains. If you held bitcoin for less than 365 days, you realized a short-term gain. Long-term gains are realized when you sell cryptocurrency after holding it for more than a year.
The short-term gain tax rate for cryptocurrency is the same as for other short-term gains. For example, the short-term tax rate in 2021 ranges from 10% to 37%, depending on your income. The 2021 tax rate for long-term bitcoin gains is significantly lower, between 0% to 20%, depending on your income.
While you can buy real estate with bitcoin, it isn’t necessarily a simple process. And there can be risks to doing so, especially if you don’t report the sale or exchange or if your bitcoin is of questionable origin. In recent years, the federal government has started to take a much closer look at all cryptocurrency transactions due to the frequency with which people use these assets to commit money laundering. If you are serious about using bitcoin to purchase real estate, it is best to work with an experienced cryptocurrency and blockchain lawyer who is familiar with these transactions and can advise you on how to protect yourself while staying on the right side of the law.
The Blockchain and Cryptocurrency Lawyers at Oberheiden, P.C. Represent the Interests of Cryptocurrency Investors Across the Board
If you have concerns about selling or exchanging your bitcoin for real estate, reach out to the knowledgeable bitcoin lawyers at Oberheiden, P.C. At Oberheiden, P.C., we have assembled a team of former federal investigators and prosecutors, as well as a nationwide team of blockchain consultants to help our clients understand their obligations when it comes to everything blockchain-related. We make ourselves available to you 24/7, so your lawyer is never more than a phone call away. To learn more, and to schedule a free consultation, contact Oberheiden, P.C. through our secure online contact form.