With cryptocurrency becoming more prevalent in today’s economy, discussion has turned to business transactions being made using cryptocurrency, in particular when buying and selling real estate with cryptocurrency. Already, certain American brokerages are listing residential properties in Bitcoin. In fact, recently there was a much talked about news story about a cryptocurrency tycoon purchasing a $28,000,000 condominium in Toronto and paying for it partly with cryptocurrency. However, these cases are not the standard and cryptocurrencies have not yet become mainstream, especially when transacting in real estate. However, analysts believe that as the real estate industry begins to utilize blockchain technology, real estate transactions using cryptocurrencies will be rising.
What does this mean for the Canadian homebuyer or real estate investor who is looking into buying or selling real estate with cryptocurrency?
Some of the key points being discussed are:
Lawyer trust accounts:
As of now, the Real Estate Council of Ontario has indicated that it is uncertain about the idea of completing financial transactions in cryptocurrencies, such as Bitcoin or Ethereum. The Council’s main concern is that cryptocurrency cannot be held in trust the way regular bank funds are during real estate dealings. If cryptocurrencies are not held in a lawyer’s trust account, there is a lack of oversight and accountability, which generates more risk to the parties involved.
In January 2018, the Real Estate Council of British Columbia banned the use of cryptocurrencies in real estate transactions overseen by a brokerage. The provincial regulator added that deposits on homes in the province must be held in trust and, as cryptocurrencies exist outside of the purview of banks and governments, deposits in cryptocurrencies cannot be held in trust.
It should be noted, that the use of blockchain technology is a perfect solution to lawyer trust accounts. Not only could the funds be released using smart contracts but the record of the transaction can be permanently stored on the blockchain.
With new types of cryptocurrencies being developed and offered almost daily, the price can be extremely volatile. If 20 Bitcoin can be worth $150,000 the day the offer was made and $75,000 the next month, how can a vendor be sure that the purchaser will have enough currency to complete the transaction on closing? This uncertainty may keep vendors wary of selling properties for cryptocurrency.
It is important to note, anyone looking to hedge their transactions in Bitcoin can buy or sell Bitcoin futures contracts on the CME – a leading international derivatives exchange. Such contracts can be traded through a registered futures broker. A Bitcoin futures contract is priced in Bitcoin and represents 5 Bitcoin. So if a property owner sold a property for say 300 Bitcoin (currently worth approximately $2.1 million USD), and wanted to hedge that they would sell 60 Bitcoin futures contracts for settlement sometime after the scheduled closing date. On the closing date, when the seller receives their Bitcoin they would close out the Bitcoin futures contract at the then settlement price. In that way, their selling price is effectively fixed in US dollars at the futures price at the date the hedge is established. As with all futures contracts, the seller would have to post margin on the Bitcoin futures contract based on the futures broker’s margin rates. Should the value of Bitcoin rise they may have to post additional margin.
Land transfer tax:
If real estate is purchased for 20 bitcoin, how is land transfer tax calculated? What exchange rate is used on the bitcoin for the land transfer tax amount? These details can have a substantial effect on the amount of land transfer tax paid on a closing. The various ministries who collect land transfer tax have yet to weigh in on this.
If one lists real estate in bitcoin, websites such as MLS must develop a mechanism to keep track of conversion rates, as it lists its prices in government regulated currency. It would need to adjust its listing price on its websites for any properties listed in cryptocurrency, as the value of the Canadian dollar, or for that matter in any other international currency, can fluctuate daily.
Many potential buyers and sellers of real estate are still not comfortable with cryptocurrencies. Therefore, if one is looking for a partner who is only willing to transact in cryptocurrencies, there is a smaller pool of potential partners.
As the cryptocurrency space is not yet mature, there is some uncertainties as to how gains and losses in cryptocurrencies will be treated for income tax purposes. Many investors would like more certainty on taxation before completing financial transactions using in cryptocurrency.
Stay tuned, as the Zeifmans’ Real Estate team will be further exploring the implications of using cryptocurrencies for financial transactions in the Real Estate sector, in upcoming news articles on Zeifmans.ca.