In September of 2017, cryptocurrencies took a major step toward legitimacy when Texas luxury real estate firm Kuper Sotheby's International Realty announced that it had conducted the country's first real estate transaction using Bitcoin. The cryptocurrency has already been used in retail and restaurants, and it was only a matter of time before it made its way into the home buying process. Since then, Bitcoin has been used to purchase everything from land in Lake Tahoe to condos in Manhattan and the UK. Are these sorts of transactions the future of real estate arrangements or just a passing trend?
What is Bitcoin?
We've heard about Bitcoin on the news for months now, but many of us are still left in the dark when it comes to the function of cryptocurrency. Bitcoin may not be an easy thing to understand, but it is worth understanding. It has important implications regarding how we may be conducting business both online and in-person over the next few years.
Let's consider how a physical, in-person transaction is conducted: You're a farmer who is selling carrots. I meet you at your farm and exchange one dollar for one carrot. You now physically have one dollar and I physically have one carrot. There was no need for another party to stand there and confirm that the transaction took place, because the transaction is already done.
But what if I wanted a digital carrot?
How do I know that the same digital carrot that you sold me online is now mine and only mine? Perhaps you sent over a copy to a friend first. Now the value of my digital carrot is diminished. This idea is referred to by economists and computer scientists as the "double-spending problem." Digital files can be duplicated or falsified in the same way that counterfeit money can lead to inflation by creating a new amount of fraudulent currency that did not previously exist. For years, this double-spending problem caused disruptions for digital transactions until it was prevented by using a combination of centralized and decentralized systems. In a centralized transaction, an online trusted third party verifies whether the transaction took place. By 2009, the cryptocurrency Bitcoin implemented a decentralized solution for online transactions.
These digital carrots began to be tracked in a ledger, or accounting book. This was a great way to keep track of all digital carrots on the internet, however there were a few remaining issues. What if the person creating these digital carrots just created more for himself? And how can we avoid pulling in third parties to oversee all of these transactions? These problems were solved by making the digital ledger available to everyone. You can't possibly cheat a system that syncs the ledger within everyone's computers. In addition, you can participate in the network and update the ledger to ensure that everything checks out. Crunching the numbers (or "digital mining") would reward you with more digital carrots. This decentralized transaction is now the same as a physical transaction. The total number of carrots is defined in the public ledger, and now I can certify when a transaction has been completed.
What Determines Bitcoin's Value?
Now that several cryptocurrencies have been put in place, economists, programmers and politicians have vehemently argued over their values and what determines them. In economics, items typically have economic value because people desire them. Bitcoins do not have value as a physical commodity like gold. Rather, cryptocurrencies have value because it is popular, decentralized and limited. Bitcoin is hard for governments to trace and tax. And unlike flat money produced by central banks, there is a cap set on total Bitcoins, limiting how much the currency can devalue through inflation. The theoretical limit of BitCoins in existence is 21 million, with 16.3 million currently in supply, leaving 4.7 million left to be mined.
Buying and Selling Property with Bitcoin
Bitcoin's market value has wild swings in value and has been appreciating at lightning speed as of late. When Sotheby's announced it had facilitated one of the first US home sales in bitcoin, the dollar value of a single bitcoin equaled $3,429. Now, the dollar value of a single bitcoin is $16,211.
"Austin is a really technologically-advanced city, I'd say, so I was surprised we hadn't heard anybody wanting to do this before," said J. Kuper at Sotheby's International Realty. "But candidly, we didn't know how to do it. It was a quick challenge and scramble to figure out all of the moving parts, but we were instantly excited about the opportunity to figure that out." Given that Bitcoin's value fluctuates from day to day, the risk was on the buyers side and the seller agreed to a fixed price in dollars.
One of the initial attractions of using Bitcoin for these transactions was the lack of regulation so far in cryptocurrency regarding how they are taxed. The Internal Revenue Service issued guidance on cryptocurrency transactions in 2014. "What they said in that guidance is if you hold Bitcoin or Ethereum or one of those other convertible digital currencies as a capital asset, when you use that Bitcoin to purchase goods or services - so for example, if I were to take $1 million in Bitcoin to buy an apartment building or something - to the extent that Bitcoin has appreciated since I acquired it, any of that gain, that built-in gain, would be taxed when I used the Bitcoin to buy the building," described tax attorney Jeremy Naylor.
The U.S. government recognizes Bitcoin as property and officially under the new tax law, anyone trading cryptocurrency would trigger a capital gains tax. Buying property with cryptocurrency can be compared to trading stock for a new home. The home buyer would pay roughly 20% in capital gains tax and another 3.8% net investment tax on the amount their Bitcoins had appreciated since they first bought or mined them. That could create a large tax bill if the trader first received their bitcoins years ago when they were worth less than a dollar. In this real estate transaction, however, the buyers and sellers used BitPay to convert the Bitcoin into dollars, making any appreciation taxable. Sellers accepting Bitcoin should keep a sharp eye on the fluctuations in the currency's value due to its volatility. Some home buyers are avoiding these pricey taxes by paying for their homes through loans collateralized by Bitcoin.
Are Cryptocurrencies Here to Stay?
So far, most — if not all — listings accepting cryptocurrencies have closed by converting the buyer's currency into cash. The transactions have been appealing to those who don't want to rely on intermediaries such as banks and escrow officers; those who want some level of anonymity as to the source of their funds; and foreign buyers who want to avoid the red tape of the current transaction process. Its surging price value is causing investors to use their gains to buy up properties. Further, more real estate clients are talking to their agents about the cryptocurrency and accepting it as payment in tractions. Redfin has reported finding 75 listings nationwide in which the seller said he or she was willing to accept Bitcoin. While more transactions seem to gravitate toward digital currencies, the dispute as to whether Bitcoin's astronomical growth will turn into a crypto-bubble is still up in the air.