Monday, June 7, 2021 / by Mike Shoaff
Crypto and Buying a Home
Originally posted on Porch.com
If you’ve ever walked around at an arcade with a couple pocketfuls of game tokens or won similar tokens at a fair to be exchanged for candy and stuffed bears, you already know how cryptocurrencies work. Except cryptocurrencies, like Bitcoin and Ethereum, are digital currencies that can be used to purchase goods and services. Today, there are more than 6,700 types of cryptocurrencies, some better known than others. Traded as commodities on the stock market and known for their volatility, cryptocurrencies have become increasingly mainstream as more people invest in them and trust the blockchain technology employed to secure them. In fact, some people are using their crypto assets to purchase large, expensive items—like houses!
Introduction to Cryptocurrencies
Major cryptocurrencies such as Bitcoin, Ethereum, XRP, and others are a digital form of currency. Once you own them, you can use them to purchase goods or services. Although banned in some countries such as China, major digital currencies are growing in popularity in the U.S. and other nations around the globe. Increasingly, companies like Microsoft have begun to accept these currencies as a form of payment. In fact, you can even book airplane flights on some platforms using your crypto.
As cryptocurrencies mature and become more widely accepted around the world, people who use them to purchase large, valuable items like homes or even yachts will become less an anomaly and more commonplace. In fact, the normalization of these digital currencies may actually help to tame their historic volatility on the market. So, while they may become subject to more regulation, taxes, and more widespread acceptance, they’re also likely to achieve more stability, and that’s good news for crypto investors who want to use their assets as collateral or payment on costly goods and services.
Buying a Home with Cryptocurrency
Using cryptocurrency to purchase real estate is perfectly legal in countries where crypto is accepted, providing both the buyer and seller agree to transact the deal using whatever kind of crypto is on the table. That’s the sticking point: Both parties must agree to the use of crypto. Sellers who accept this form of payment can retain it as their crypto asset or they can transfer their Bitcoin or other crypto into dollars using a conversion service like BitPay.
In the US, BitPay has been involved in a number of real estate transactions when the seller was willing to accept crypto so long as it was converted into dollars during the deal. One of the most valuable real estate deals handled by BitPay sold for 2,739 Bitcoins, which, at the crypto’s current value, converted to roughly $1.6 million. On the other hand, some real estate sellers are perfectly content to allow their payment to remain in crypto form, and that trend is likely to continue and grow as digital currencies become less volatile and more widely accepted.
What Are the Pros of Using Crypto to Purchase Real Estate?
If you have the crypto, you might find it easy and convenient to use it to purchase your next home. On the other hand, if you find a property that suits but the seller isn’t interested in your Bitcoin, there’s nothing preventing you from cashing it in yourself and paying in dollars. However, there are some benefits to bringing your crypto assets to the bargaining table.
When you have a valuable crypto asset, you’ll find that you have something that’s increasingly in demand. In fact, you may have already noted that some sellers are advertising that cryptocurrencies are welcome. While many sellers are prepared to convert their crypto into a dollar amount immediately with the sale of their property, others view the crypto like the commodity it is—something that could very well go up in value. Certainly, it’s a gamble—and the risk doesn’t always pay off. But sellers who don’t mind playing the waiting game can hang on to the crypto until they feel comfortable converting it at the right time, making a nice profit.
Locks in Profits
If you have crypto, you might be feeling a bit squeamish because of its historic volatility. You, too, may wish to convert your asset into a different type of asset like a house that will allow you to more reliably lock in your profits. Your real estate purchase is an investment, too. If you’ve noticed that your Bitcoin or Ethereum is ranging in value a bit too much for comfort, you may be ready to turn your crypto asset into a less-volatile real estate asset. And that’s not usually a bad investment decision—particularly if you buy a property that’s safely expected to appreciate in value.
What Are the Cons of Using Crypto for Real Estate Transactions?
There are some downsides when it comes to paying for a house with cryptocurrencies. However, you’ll want to weigh your own specific circumstances in light of each.
Crypto’s Limited Availability
First, cryptocurrency still only involves a small number of real estate deals. Only a very small percentage of sellers are open to accepting crypto or even advertise that they are open to this form of payment. In fact, the use of crypto for home deals is still in its infancy. While it is increasingly used to purchase commercial property, it’s still new in that marketplace, too. Nevertheless, these transactions are growing in number.
It’s a Gamble
The cryptocurrency in your possession is associated with a value. That value may fall after you purchase your house with it—which means you let go at the right time—or it might rise, leaving the seller with the profit that could have been yours had you hung onto it longer. In this way, buyers are taking a gamble by using their crypto and forfeiting the opportunity to enjoy a significant profit should the crypto enjoy phenomenal value growth. On the other hand, remember that property, too, is an investment that may appreciate in value.
It’s Complicated: Taxes
Cryptocurrencies, being effectively unregulated, can be frustrating at tax time. There is a capital gains tax that you have to be aware of any time you spend, trade, or exchange your crypto. If you plan to exchange your cryptocurrency for a home, you should definitely involve an accountant who is experienced with these types of crypto real estate transactions. Many CPAs are investing time and energy into understanding the ins and outs of crypto trading.
Crypto is Volatile
One of the reasons you might be tempted to use your crypto to pay for a home is because of its volatile nature. Even as you decide to pay with crypto and begin your hunt for a house, your Bitcoin or other crypto’s value could rise—but it could also tank, forcing you to make other payment arrangements or to pay with more of your digital currency than you had expected.
Sell Your Cryptocurrency for a Downpayment
If you’re planning to finance part of your home, you may want to consider converting your crypto into dollars in order to make your down payment. This certainly sounds simple enough, but banks tend to be a bit nosy about where you obtained your down payment and may want to have proof that you’ve had this money for a period of time before approving your application for a home mortgage.
However, you can provide proof with a bit of diligence. For instance, you need to keep track of all of your transaction dates such as each time you purchased the cryptocurrency and those transactions’ blockchain IDs. Banks, of course, are used to viewing statements, so yours may be unused to dealing with blockchain. On the other hand, you can always put the converted dollars into your savings or checking account and let it sit there for a period of time—about 60 days—in order to satisfy the bank.
Qualifying for a Mortgage with Cryptocurrencies
Your cryptocurrency is an asset. No, not all banks understand that asset, but they’re increasingly becoming obligated to do so. In fact, major mortgage loan companies like Fannie May have indicated that Bitcoin can be used as collateral to secure a home mortgage loan. However, these lenders have a strict requirement that the Bitcoin transactions must have a strict paper trail that includes documentation of your original crypto purchases and documents showing their sales. This can amount to quite a bit of paperwork, but if you don’t mind, you can qualify for a crypto-backed mortgage in this manner.
Is a Crypto Real Estate Deal for You?
When cryptocurrencies first came into use, few people dreamed they could be used to purchase real estate. Today, we know they can, and some people have already opted to use theirs to buy a home or commercial property. Is this the right move for you? You’ll definitely want to weigh the pros and cons outlined here carefully. You might even want to consult with your crypt-experienced CPA before you rush into any real estate transactions. The good news is, using your crypto is definitely an option you can consider, and it might be the ideal option for you.