Bitcoin’s value has increased sharply over the last few months, providing professional and amateur investors alike with some extra cash in their wallets. We think that this has led to an uptick in inquiries with our law firm regarding how payment in Bitcoin may be used in certain real world transactions. Recently we had the opportunity to consider one such inquiry in the context of a real estate transaction.
We take for granted the exchange of the US dollar for something of value, like a home, because we’ve been utilizing the US dollar in such transactions for a very long time. The method of exchange is well settled; not so with cryptocurrency transactions
Today, with the rising value of various cryptocurrencies and with an increasing population holding some (or all) of their wealth in these new forms, we need to examine the legal issues which arise in these crypto-transactions to ensure that such transactions will attain our client’s desired result.
The following are just a few of the matters that need early attention:
1. Application of Anti-Money Laundering (“AML”) and Know Your Customer (“KYC”) Laws.
Due to the anonymity of crypto-transactions, the seller of a home needs to ensure that the acceptance of Bitcoin does not violate applicable AML and KYC laws. This would typically only arise in a scenario where the buyer and seller agree that the purchase of the home will be made in Bitcoin, as opposed to converting Bitcoin to US dollars prior to settlement.
2. Escrow and Transfer Issues.
In most real estate transactions in New York, the buyer will provide the seller with an earnest money deposit, typically between 3% and 10% of the purchase price. This deposit is typically held in escrow with either the seller’s attorney or a real estate agent involved in the transaction. If the transaction is being settled in Bitcoin without converting to US dollars, then special issues arise in escrowing Bitcoin. For example, the parties will likely need to find someone who holds a BitLicense, which is required by the New York State Department of Financial Services for any entity that holds cryptocurrency on behalf of another person or entity.
Another option, albeit a riskier option, would be using a legal agreement that allows for a verification of the transfer of value, authorizing the exchange of whatever it is that is being purchased, in this case, a house.
3. Using a Clear Definition of the Value or Currency Being Exchanged.
Most contracts today are written with the assumption (or by express terms) that the value being exchanged is in US dollars. When a cryptocurrency like Bitcoin becomes a part of the payment, we must clearly define the value and how the Bitcoin is measured so that the parties can be sure they understand how any fluctuation in the dollar equivalent of Bitcoin might affect the closing of the transaction.
If two parties enter a contract for the purchase and sale of real estate in Bitcoin, the value of that Bitcoin can change significantly between contract signing and closing. To minimize risk, the parties should define the purchase price as the value of Bitcoin in a specific fiat currency, like the US dollar.
Many transactions require reporting to governmental entities. In the case of a real estate transaction in New York, there are a number of places that receive notice of the transaction, including the local assessor’s office, NYS Department of Taxation and Finance, and the IRS. How the provision of cryptocurrency enters into this reporting leaves open a number of questions that need attention. For example, an all-Bitcoin transaction may complicate the calculation of transfer tax.
5. Tax Implications.
The treatment of cryptocurrency is often characterized as an investment and not as a currency, like the US dollar. Indeed, the IRS treats Bitcoin and other cryptocurrencies as personal property and not as currency. This can have tax implications for both a buyer and a seller that need attention and understanding by the parties and their tax advisers.
If you have questions regarding cryptocurrency transactions, contact attorney Matthew Ryen or Collin Doane in our Business, Corporate & Banking practice area .