You May Want to Think Twice About Using Crypto to Buy Real Estate

Great wealth has been accumulated by real estate investors who strategically buy properties, resell them at a gain and reinvest their gains into new properties. It is not uncommon for an investor to sell a building and reinvest 100 percent of their gains into a new building or multiple buildings by utilizing a “1031 tax-deferred exchange.” Taxes on these gains can be deferred for years and in return investors who utilize these exchanges multiple times have an opportunity to quickly build a large portfolio of real estate.

Yes, generally taxes will be due for the gains, but being able to use pre-tax dollars increases buying power and allows for investors to build upon their wealth at a much more rapid rate. This is a great strategy for sellers of real estate. Buyers typically do not have to worry about paying any taxes until they sell their properties. Or do they?

You might be shocked to hear that purchasing property with cryptocurrency might incur an unexpected tax for the buyer. Below, we discuss what you should know about the tax implications of purchasing real estate with cryptocurrency.

Over the course of the last few years, blockchain technology has greatly altered traditional real estate transactions, and in particular, the exchanging of payment in the form of cryptocurrencies, such as bitcoin. Significant sums of money have been made by crypto investors, and these new bitcoin millionaires have a growing interest in diversifying their portfolios by buying real estate. Using cryptocurrency to purchase real estate is indeed legal tender, as long as the seller is willing to accept the currency as payment. The downfall to using crypto is that the buyer has a taxable transaction.

Picture this, an investor buys a property with bitcoin. Typically, the investor as a purchaser would not have any income tax exposure on the transaction if it was a cash or debt purchase. In this case, while it is not the property that the investor purchased that is a concern for taxes, it is the legal tender they used to buy the property that is the tax concern. When using bitcoin or any cryptocurrency to purchase an asset, one must pay capital gains taxes on the difference between the cost basis of the crypto and the monetary value received when paying with it.

For example, if you held $100,000 of bitcoin that appreciated to $5 million and purchased real estate using these bitcoins, you would need about $1.7 million to cover your federal capital gains and state and local taxes from the appreciation of the cryptocurrency. Crypto investors need to be careful that they reserve enough funds to cover these taxes, as one cannot defer crypto gains with a 1031 exchange even if buying real estate. As a result of the tax implications, one’s buying power is reduced by using bitcoin to purchase real estate. Therefore, it is important to reconsider purchasing property with non-traditional currency.

Remarkably, it is possible to pay capital gains tax twice on investment into a real estate asset, once upon the purchase and again upon the future sell. Investors should be cognizant of the tax rules surrounding the use of crypto when making asset purchases. The last thing you would want is to buy a building using crypto, only to find out months later that you have a large tax bill looming. It can be especially devastating if your remaining cryptocurrency decreased in value and you did not have enough to cover your taxes. This could result in a forced sale of the building, perhaps at a loss, to quickly recover the funds needed to cover your taxes. Consequently, it is extremely important for one to understand the tax rules of using crypto to make asset purchases.