With the rising values of digital assets like Bitcoin and Ethereum, many early adopters and savvy investors are trying to find ways to use these cryptocurrencies to finance their needs. While walking into a store and using Bitcoin to purchase goods is still not widely available, there are many ways to use your digital assets to purchase assets, such as real property, in order to diversify your investments and supplement your lifestyle.
The process, taxes and legal issues related to using cryptocurrency to purchase real estate can be confusing. If you are financing part of the real estate purchase with a mortgage you will have to deal with a banking institution, as well as lawyers on both the buyer and seller side who will need to satisfy know your client and anti-money laundering obligations before depositing money into their respective trust accounts. Land transfer tax and other taxes will need to be paid in fiat currency and professional fees will have to be satisfied. In most cases the seller will likely not want to accept crypto and so the funds will have to be converted in a tax efficient way.
Here are some important things to consider if you are contemplating purchasing real estate using cryptocurrency:
1) Capital Gains Tax: when you cash out cryptocurrency for an amount greater than you purchased it for, or if you exchange it for another capital asset, there will likely be a deemed capital gain. It is important to consider what the tax consequences of that gain will be in order to assess how best to structure the disposition.
2) Anti-Money Laundering Rules: when you are dealing with financial institutions, law firms and the exchange of digital assets there are a number of layers of “KYC”, or “Know Your Client”, verifications that need to be complied with. Some of these can be onerous and it is important to have someone on your side who can help navigate you through the requirements in order to ensure that you do not run afoul the rules and possibly negate your ability to use your digital assets entirely.
3) Exchanging Crypto for Fiat: real estate can range in value and can go as high as several millions of dollars, and so you want to be sure that you are dealing with a trusted partner when converting your digital assets into fiat. Having professionals who partner with reputable and licensed Money services businesses to convert the crypto is essential for peace of mind.
4) Working With Professionals: although many professionals, such as accountants and lawyers, advertise that they are familiar with and can facilitate cryptocurrency transactions, the reality is it is still a very new area and it is hard to verify who really knows the space. You don’t want to be charged by novices or inexperienced professionals for learning time, and certainly you don’t want your largest lifetime purchase to be soured, or even worse, exposed to liability or additional taxes about which you were not made aware.
Grinhaus Law Firm has a deep and internationally recognized expertise in digital asset and cryptocurrency laws, regulations and transactions. Please contact us to discuss the process, costs and options associated with the purchase of real estate with cryptocurrency.
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