Cryptocurrency is often in the news due to the tremendous growth of some of its most popular coins such as Bitcoin and Ethereum.
And these eye-popping returns have help to draw in millions of people into the cryptocurrency investing game.
But while these investing opportunities can be exciting, the whole point of cryptocurrency is to, well, use it to make various purchases. And using a decentralized form of finance like crypto could potentially speed up the process of buying real estate — and maybe even save you money.
There are a few features of crypto that could make it a desirable form of payment for large transactions like buying a home. Let’s take a look at how to use crypto to buy real estate.
Pros And Cons Of Buying Real Estate With Cryptocurrency
Before you decide to use crypto to buy real estate, it’s important to understand how it works. When you use cryptocurrency to purchase anything, the transaction is processed using a public ledger, known as a blockchain. The blockchain's miners (or validators) work together to verify the transaction.
However, it’s also important to note that the digital tokens issued for use on the blockchain — the cryptocurrencies — are also volatile in price. Wide price swings can make it difficult to know how to value the transaction. As a result, it might be difficult to find someone willing to complete the contract using cryptocurrency.
Carefully consider the pros and cons of using crypto to buy real estate before you make your decision.
Pros Of Buying Real Estate With Cryptocurrency
Cons Of Buying Real Estate With Cryptocurrency
How To Use Crypto To Buy Real Estate: 3 Ways
Still think that you might want to use crypto to buy real estate? If so, here are three of the best ways to do it today.
1. Sell Your Crypto And Use Cash
Although some may feel that this defeats the purpose of using crypto in the first place, the easiest way to use crypto to buy real estate is to just sell it and use the cash. Once you’ve sold your crypto, you can then buy a home using cash, or use the cash for a down payment and finance the rest.
You can sell your crypto for dollars using an exchange like Coinbase or Gemini. It’s also possible to use a service like Bitpay to convert your crypto to cash and send it to the seller.
However, it’s important to note that the IRS views cryptocurrency as property for tax purposes. As a result, when you sell your crypto for cash, it’s considered a taxable event. You’ll need to pay capital gains tax based on how long you’ve held the cryptocurrency and your basis.
For example, if you sell five Bitcoin for a total of $200,000 (assuming you could sell each Bitcoin for $40,000 each), and your cost basis was $100,000. In this case, you have a profit of $100,000. Your fees will depend on the exchange used to sell your tokens or whether you use a person-to-person transaction. But let’s say you paid $2,000 in fees.
In this example, the IRS will expect you to pay capital gains taxes on $98,000 in profits. If you’ve held your tokens for more than a year, you can access the long-term capital gains rate. Otherwise, the gains will be taxed as regular income.
2. Send The Cryptocurrency Directly To The Seller
Another option is to send the crypto token directly to the seller. When using crypto to buy real estate, you’re more likely to have success if you rely on Bitcoin rather than another token.
However, finding a seller to directly accept your crypto can be difficult. One way to get help is to choose a real estate agent that specializes in cryptocurrency purchases. These agents can help you find listings that accept Bitcoin and other cryptocurrencies. They may also able to help you find crypto-friendly title insurance and escrow companies.
When you use this method, you'll both need a cryptocurrency wallet. You’ll need the address of the seller’s wallet in order to send the crypto. Double-check the address so you don’t end up sending it to the wrong place.
There are some blockchains, like Ethereum, that can smooth the process with smart contracts, reducing the need for escrow. However, it’s important to note that you’ll pay a gas fee for using the Ethereum network. And depending on the time of day and how much traffic is on the blockchain, you could wind up with steeper fees than you expected.
Finally, realize that making a purchase with your cryptocurrency is a taxable event. So, once again, you’ll have to figure capital gains tax on the value of the tokens used to complete the transaction.
3. Use A Loan Against Your Crypto
If you want to hold on to your crypto assets, but still use them to buy real estate, you could borrow against your holdings.
Rather than selling your crypto or sending your crypto to the seller, you could use your cryptocurrency tokens as collateral on a loan. Platforms like Celsius allow you to get rates as low as 1% APR (0% in California) to borrow against your crypto.
This can be a good choice if you have a decent amount of crypto and hope to see it appreciate in value. On top of that, you have the potential to get a much lower interest rate than you’d see if you borrowed from a bank. Your actual APR will depend on your loan-to-value (LTV) ratio, meaning how much crypto you’re willing to use as collateral. The lower your LTV, the lower your interest rate.
Another consideration is that repayment terms are likely to be less flexible. For example, you might have to repay your crypto loan in just three years instead of the 30 years that is common for mortgages.
However, if you can afford to repay the loan quickly (perhaps through using equity financing once you own the home or with the help of revenue from income-producing property), it can make sense to use your crypto as collateral. This is especially the case if you think that the value of the assets will increase over time.
What About Using Crypto For Mortgages?
Unfortunately, few lenders use crypto as a down payment for mortgages. You might be able to use your assets as a reserve or for closing costs. But the reality is that many lenders require you to liquidate your crypto assets and hold them as U.S. dollars in an approved account.
Should You Use Crypto To Buy Real Estate?
With a little extra legwork and determination, you might be able to use crypto to buy real estate. But that doesn't necessarily mean you should. Weigh the pros and cons and research the tax implications to decide if it’s the right move for you.
Carefully consider whether your crypto assets are large enough to use for a property purchase. You should also decide whether you’re better off holding the crypto and getting a more conventional loan. If your crypto increases in value, you could benefit more later by holding onto your current tokens.
On the other hand, if don’t think that cryptocurrency and decentralized finance (DeFi) will really catch on, using your assets now for real estate might be the better move. Real estate is a tangible asset that is traditionally less volatile than cryptocurrency so you might consider it a fair trade.
Miranda Marquit, MBA, has been covering personal finance, investing and business topics for more than 15 years, and covering crypto topics for more than 10 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. She is an avid podcaster, co-hosting the podcast at Money Talks News. Miranda lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.