What You Should Know Before Using Crypto To Buy A Home
Cryptocurrency continues to receive many new use cases, including its involvement in the real estate market. In principle, making a transaction is easy because all that is needed to complete the transaction is for both parties to agree to use cryptography. While this is true, buying a property involves several steps that are not common in other big ticket purchases.
Before taking the plunge, here are some key things buyers should know before buying real estate with Bitcoin.
You will want to know how cryptocurrency works.
Cryptocurrency is all the rage among savvy investors. However, it also requires a bit more research than traditional platforms. Investors will need to understand how a digital wallet works and where they can buy and sell their tokens. Cryptocurrency wallets are software that store a user’s public and private keys for sending money and performing transactions. The only thing is, unlike traditional wallets, digital wallets don’t store actual cryptocurrency. Instead, they store records of transactions that users have made.
Next, buyers need to think about how a cryptocurrency transaction works. When using crypto as a payment, buyers will hand over ownership of their currencies to a new user’s wallet. To verify that these funds belong to the buyer, the private key of their wallet must match the public address assigned to the cryptocurrency. When the keys match, the buyer’s wallet balance will decrease and the receiver’s wallet will increase. Wallets can take many forms, including a software, hardware, or paper wallet.
Cryptocurrency exchange platforms work the same way as a traditional brokerage; however, starting small will only benefit the investor.
You will probably want to hire an escrow service.
Unlike fiat currency, buyers cannot hold digital currencies in trust accounts. When you pay your lawyer money when buying a property, the money is held in this special trust account until you and the seller work out the details. Third-party liability is even more necessary when transactions involve a blockchain due to the immutability of the technology. In the cryptocurrency world, a comparable service is the use of professional escrow agents. Escrow agents should be involved in any high-value service that requires meeting several conditions, as they are holding funds in a secure account. Therefore, if the seller does not transfer the deed to the house or decides not to complete the home inspection, the escrow service will not release the funds to the seller.
You will need to anticipate volatility.
Cryptocurrency has a reputation for being extremely volatile. Market volatility means that if the buyer and seller set a price in crypto, the buyer or seller can lose out if the prices fall. For example, a house sold for 500,000 may be the equivalent of 10 bitcoins to 50,000. However, by the time the paperwork is complete, the coin may only be worth 30,000 and will require more bitcoin to pay off the house. Since cryptocurrencies are not regulated by law, it can be virtually impossible to estimate the future price of assets.
First-time homebuyers are encouraged to price in fiat currency and transfer the equivalent amount of crypto upon closing. Defining a fiat currency value will protect buyers until the seller transfers title. Alternatively, some users use a cryptocurrency exchange to immediately convert their crypto holdings into fiat currency.
You still have to pay taxes.
There are still a lot of uncertainties about how real estate transactions involving bitcoin work for tax purposes. Typically, the government will base land transfer tax on the original purchase price of the property. If you pay for a house with 50 bitcoins, the price could vary significantly depending on when you calculate it. In Canada, the government still values properties in Canadian currency for tax purposes. By comparison, the United States considers every crypto transaction to be a capital gains tax. But the tax treatment will be different in other countries. Therefore, an experienced tax professional or accountant may need to be hired in advance.
However, in the near future, Ethereum announced in March that a program may be underway to enable mortgages. Lending money directly in cryptocurrency could be one way to get tax breaks.
While there is still some risk involved in trading cryptocurrencies, many continue to sell their buy and sell houses with Bitcoin. The ease of use for transferring large sums of money without borders and the low transaction fees always outweigh the potential disadvantages of using it.
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