Ten years ago the housing market crash sent shockwaves through the economy. Since then, some major changes have hit the real estate market, from the tightening of lending standards and the near-abandonment of subprime loans to the affordability crisis affecting more and more cities across the nation. The houses may have stayed the same but the way we buy them is undergoing some serious changes.
Enter cryptocurrencies. Even a few years ago, using cryptocurrencies like Bitcoin or Ethereum to help pay for a down payment or a chunk of your mortgage would have been unthinkable but it is becoming increasingly common in today’s real estate market. While not all mortgage lenders will accept or even understand cryptos, there are a growing number of brokers taking these new forms of payment very seriously. So if you’re thinking of putting some of your Bitcoin to good use, then this guide is for you.
While it’s absolutely possible to pay for a portion of your home or mortgage with a cryptocurrency like Bitcoin, Ethereum, or Dash, there are a few factors you should be aware of before you decide to move forward with the idea.
Before investing in cryptocurrency in their first place — let alone using it to help pay for either your down payment or mortgage — you have to consider the volatility of the market. Prices don’t just fluctuate on a day to day basis, they can skyrocket or plunge. So before you to decide to cash out your Bitcoin or Ethereum, make sure that you’re comfortable with the possibility of either one of those cryptos experience sharp rise not long after you do so.
Likewise, don’t hesitate to sell if whatever cryptocurrency you’re going to be using hits a price that will allow you to afford that down payment because you never know what its price is going to look like tomorrow.
While this is nothing new to anyone who’s sold cryptocurrencies or stocks before, make sure you accurately report your transactions to the IRS. Failing to do so could land you in a heap of trouble with the organization and that’s not something that anybody wants to see happen. So be sure that you keep documentation of any and all profit you make from selling your cryptocurrencies so that you can accurately report your financial situation come tax time.
If you’re in a position where you can sell off cryptocurrency as a means of paying for your down payment and/or a chunk of your mortgage then the chances are pretty good that you were an early adopter of the movement. This means that you are also likely to have a sizeable amount of your net worth tied up in a cryptocurrency or two. Selling some of that Bitcoin or Dash to help buy a home will be one of the best decisions you can make for your portfolio as diversification helps to protect yourself from any one market ebbing and flowing too much. Not to mention that there are few investments better than real estate.
Before you can apply your favorite Bitcoin or altcoin to the price of a new home, you first need to know how to sell it in the first place. Here’s how you can liquidate those coins and get the ball rolling.
First, you’ll need to transfer your balance from your crypto wallet to an exchange platform like Coinbase, Bittrex, or Kraken. Since you’ll probably be making a pretty large transaction if you’re putting this money toward a down payment or mortgage, it’s a good idea to send a small transaction first just to make sure that you’re sending your cryptocurrency to the correct address since you can’t reclaim any crypto you accidentally sent to the wrong address. Once you’ve verified that your chosen cryptocurrency is going to the right place, you can send the rest.
Once your balance is on your exchange of choice, you can then either trade them for different cryptocurrencies or for USD directly. Well-established cryptocurrencies like Bitcoin, Ethereum, and Litecoin can be withdrawn directly into USD but for most other altcoins you’ll need to trade them in for one of the aforementioned coins before you can make your withdrawal. Once you’ve got your money, you can then simply transfer it to your bank account.
So you’ve sold some — or even all — of your cryptocurrency. Great! Now you need to remember to file taxes on that sale as it counts as income. While it’s tempting to abuse the relative anonymity of bitcoin and the like, there’s a good chance that doing so would make you ineligible for a mortgage loan as no broker would want to get mixed up with the IRS in such a way. So be sure to follow these steps if you want to stay in the good graces of the organization.
Fannie Mae recently clarified their position on the use of cryptocurrency in the mortgage process, saying that they do in fact allow cryptocurrencies to be used to secure a loan but only if there is a full, verifiable paper trail in place. So while your cryptocurrency holdings themselves aren’t yet taxable, you need to carefully document any profit off of any you sold as that counts as an income which, as you’re likely well aware, is taxable. So if you’ve sold any cryptocurrencies, you need to get the records on those sales. These can typically be obtained by downloading your transaction data from any of the exchanges and/or crypto wallets you use. Coinbase will even send you a 1099-K if you’ve made a profit of $20,000 or more. If you elected not to use an exchange at all then you’ll need to do your best to document all of this information on your own.
To help you out with your taxes even further, there are also programs you can download — like Bitcoin.tax — that will let you upload your transaction data in the form of a CSV and they’ll show give you a capital gains report, income report, donation report (for any gifts and tips you’ve given using cryptocurrencies), and a closing report that displays your net profit and loss.
Likewise, make sure that the sale of whatever cryptocurrency you’re planning on using has finalized at least 60 days prior to when you plan on using the funds toward your loan. This is the industry standard for any such asset liquidation and it applies to cryptocurrency as well.
How your sale(s) will be taxed.
If you’ve held your cryptocurrency of choice for less than a year before selling it then it’ll be considered a short-term capital gain, which is taxed at the same rate as normal income. However, if you’ve held onto it for more than a year then it’ll be taxed as a long-term capital gain, which means that the income will be taxed a lower rate anywhere between 0 and 20 percent, depending on your tax bracket.
Any cryptocurrency you mined is always going be taxed as ordinary income based on whatever the fair market value was when you mined it. The same is true of any cryptocurrency that you were either gifted and that was used to pay you in exchange for goods or services.
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