Call us for consultation
212.457.9797
CALL TODAYEMAIL US
October 26, 2018   |   By: Max Dilendorf, Rika Khurdayan and Gleb Zaslavsky

How to Structure New York Real Estate Transactions Using Bitcoin

Real estate sellers, developers and their brokers should consider an alternative approach for marketing and selling properties in New York to local and international buyers.  This approach involves closing real estate transactions using Bitcoin.

Some of the largest real estate brokerage firms in New York have started slowly embracing the notion of selling their clients’ properties for Bitcoin or other virtual currencies (also commonly referred to as “digital currencies,” “cryptocurrencies” or “crypto”). This article will focus on Bitcoin, as one of the most widespread virtual currencies. Bitcoin is well-embraced by regulators, which allows for a high degree of its transferability in domestic and cross-border transactions.

Below is the list of some of the active Manhattan real estate listings allowing bids in virtual currencies. Bitcoin is an acceptable virtual currency in each of the listings.

Listing Company

Listing Broker

Address

Asking Price

Listing URL

Notes

Corcoran/Douglas Elliman

Carie Chang + Valerie Lettan

10 E-76th St.

$29.95M

Link

“Along with USD, the Seller will accept payment in Bitcoin…”

Nest Seekers

Ryan Serhant + Nathan Frank

66 E-11th St.

$25M

Link

“Seller is receptive to get a partial payment in Bitcoin”

Sotheby’s International Realty

Cathy Taub + Tena Watt

40 Riverside Dr.

$15.995M

Link

“Offered for 2982 Bitcoin.”

Brown Harris Stevens

David Kornmeier

6 W-20th St.

$2.625M

Link

“Seller will accept payment in Bitcoin or Ethereum.”

Citi Habitats

Benny Kim

201 E-15th St.

$875K

Link

“Transaction can be closed using cryptocurrencies.”

Brown Harris Stevens

Antonia del Rosario

88 Greenwich St.

$699K

Link

“We accept cryptocurrency for fast closing, Bitcoin.”

However, what most real estate market participants don’t realize is that every single real estate listing in New York could be purchased with Bitcoin. This, of course, requires proper structuring and knowledgeable intermediaries, including attorneys, exchanges, banks and/or custodians.

When structuring a real estate purchase using Bitcoin (or any other virtual currency), the parties involved in a transaction must take into consideration, among other factors, tax and escrow complications for accepting payments in Bitcoin, know your client (KYC)/anti-money laundering (AML) checks on the purchaser and the purchaser’s digital wallet.

There have also been a lot of misconceptions surrounding the use and regulations of Bitcoin in the US and abroad.  We will analyze and debunk some of the common myths, like the ones that Bitcoin payments are untraceable and used mainly for illegal activities or that Bitcoin is not regulated in the US.

On the bright side, with proper legal and tax structuring, making real estate listings available to buyers interested in paying with Bitcoin presents an intriguing opportunity for sellers and their real estate agents.  Bitcoin has become a major market for investors and virtual currency miners around the world. For example, much of the world’s supply of Bitcoin are held by investors and miners from China, United States, Japan, Czech Republic, Russia, Iceland, Georgia and Canada.

As of late October, the market capitalization of Bitcoin exceeded $110 billion that has been driven largely by retail investors.  Market experts anticipate that large institutional investors will enter the virtual currency market sometime in the first quarter of 2019, once giants like Fidelity and Bakkts launch institutional custody and trading services for virtual currencies.

Given the volatile nature of virtual currencies such as Bitcoin, many investors and miners prefer to diversify their Bitcoin holdings, either by investing in precious metals or US real estate.

In addition, real estate transactions involving Bitcoin may be structured and closed efficiently—often faster than all-dollar transactions—especially if a real estate transaction involves a foreign buyer.

This article discusses and compares two general ways of structuring a real estate transaction in the US involving Bitcoin as a payment method – all-Bitcoin real estate transaction and Bitcoin-USD transaction.

The first option of an all-Bitcoin transaction involves a number of extra risks and hurdles associated with the current legal and tax status of Bitcoin. It also requires a seller to agree to accept Bitcoin as form of payment for the tendered real estate. Such method can be attractive if crypto enthusiasts happen to be on both sides of a real estate transaction.

The second option, however, allows holder of Bitcoin to purchase any real estate listing in New York, provided that the holder can pass requisite due diligence.  Such option is modeled very closely to a traditional USD (a/k/a “fiat”) real estate transaction making it attractive to all sellers, and both local and international buyers with digital assets.

Before analyzing each option, we will discuss some of the most common misconceptions surrounding Bitcoin.

Common Myths Surrounding Bitcoin

Myth # 1 – Bitcoin transactions are anonymous, untraceable and are mostly used for money laundering and as means of financing illegal activities

It is a myth that Bitcoin transactions are untraceable.  In fact, cash – not virtual currencies – is the most intrinsically private means of transacting [1].

According to Jason Weinstein, a former federal prosecutor and Deputy Assistant General in the Department of Justice’s Criminal Division:

Bitcoin and the blockchain provide significant advantages for law enforcement…The most obvious is that the blockchain allows one to trace all transactions involving a given bitcoin address, all the way back to the first transaction. That gives law enforcement the records it needs to ‘follow the money’ in a way that would never be possible with cash… [2]

Mr. Weinstein goes even further safely comparing a Bitcoin wallet to a conventional bank account in terms of traceability:

bitcoin address is essentially about as anonymous as a bank account number…even if you don’t use an exchange to obtain bitcoins you’re still not truly anonymous, because there are techniques available to help link users to their addresses[3]

In the past, the federal prosecutors have used public blockchain to track illegal transactions and connect them with perpetrators. [4]

Similarly, addressing Bitcoin’s traceability and aptness for criminal activities in response to the Senate Homeland Security Committee’s inquiry into digital currencies, Edward Lowery III, Special Agent in Charge of Criminal Investigative Division of the U.S. Secret Service, stated:

The public ledger feature of the Bitcoin blockchain differentiates Bitcoin, and other decentralized digital currencies, from many of the centralized digital currencies, such as e-gold and Liberty Reserve.  The blockchain makes it harder for criminals to hide their illicit activity.  The work of researchers to link known transactions to individual identities reduces the attractiveness of Bitcoin for criminal activities. This research also provides an additional tool for law enforcement to identify illicit transactions, assets and the individuals associated with this activity in support of apprehension, asset forfeiture, and prosecution[5]

In the National Risk Assessment of Money Laundering and Terrorist Financing Report, the UK Government determined that digital currencies pose the lowest risks for money laundering and terrorist financing.  Quite to the opposite,  Cash, banks, accountants, lawyers and other professional service providers pose the highest risk for money laundering [6].

Please refer to the following table summarizing the findings of the UK Treasury:

Myth # 2 – Bitcoin is not regulated in the US

In the US, Bitcoin and transactions involving Bitcoin are regulated by:

FINCEN

The FinCen collects and analyzes information about financial transactions to combat domestic and international money laundering.  The organization has been regulating virtual currencies and related activities since 2011.

FinCen’s rules apply to all transactions involving money transmission – including the acceptance and transmission of virtual currency.

In 2013, FinCen issued guidance confirming that Bitcoin exchanges and payment processors are financial institutions under the Bank Secrecy Act (BSA) and thus are subject to the BSA and FinCen implementing regulations, including stringent AML rules.[7]  Any virtual currency transactions exceeding $10,000 must be report to FinCen.

OFAC

OFAC is a financial intelligence and enforcement agency of the US Treasury Department responsible for administering and enforcing economic and trade sanctions in support of U.S. national security.

OFAC treats virtual currencies the same as fiat currencies (USD) when it comes to Specially Designated Nationals – a list of people affiliated with sanctioned individuals, organizations and governments.

Under OFAC, US persons are obligated to comply with sanctions obligations in transactions involving virtual currencies.

CFTC

The CFTC is an independent federal agency that regulates futures and option markets.  The goal of the CFTC is to protect financial markets from fraud, manipulation and abusive practices.

The CFTC first determined that virtual currencies like Bitcoin are commodities in 2015.  CFTC has the power to prosecute fraud related to Bitcoin transactions.

IRS

For federal tax purposes, virtual currency like Bitcoin is property.  General tax principles applicable to property transactions apply to transactions using virtual currency.

A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in US dollars, as of the date that the virtual currency was received.

Individual States

Additionally, each of the 50 states regulates use of the virtual currencies.  There are several regulatory tools that states use to supervise use of virtual currency.  These include licensing requirements and money transmission laws.

Real Estate Transactions Using Bitcoin

The following table summarizes main features of the 2 approaches to a real estate transaction using Bitcoin:  all-Bitcoin transaction and Bitcoin-USD Transaction, as compared to a traditional USD transaction in the third column:

Feature of a Real Estate Transaction

All-Bitcoin Transaction

Bitcoin-USD Transaction

USD Transaction

Settlement time

Minimal

Possible within 1-2 business days

Up to 14 business days (depending on country)

Price volatility risk

High

Minimal

Minimal

Contract default risk

High – due to crypto price volatility

Minimal

Minimal

U.S. income tax liability for converting crypto – U.S. buyers

Exists: buyer needs to realize gain on the disposed crypto, as it is considered property

Exists: buyer needs to realize gain on the disposed crypto, as it is considered property

None

U.S. income tax liability for converting crypto – foreign buyers

None

None

None

Escrow of down payment

Only some escrow agents accept crypto

Accepted by all escrow agents

Accepted by all escrow agents

Transaction fee

Minimal

1-2% conversion fee (Depending on the exchange and provider)

Minimal

1031 Exchange

Unsuitable

Suitable

Suitable

KYC/AML check

Performed by seller (recommended)

Performed by bank or third-party service

Performed by bank

 

Option 1: All-Bitcoin Real Estate Transaction –Cumbersome for Traditional Sellers Who Do Not Want to Own Crypto

In an all-Bitcoin real estate purchase transaction, a purchaser transfers a Bitcoin payment from his/her digital wallet to a seller’s digital wallet and/or digital wallet(s) of the seller’s representatives, including attorney, title company and/or escrow agent.

At least at this early development stage of virtual currencies, it is going to be challenging from the legal and tax perspective (but certainly doable) for the seller and seller’s representatives to process a real estate transaction that involves a full purchase price payment in Bitcoin.

KYC/AML Check

As no bank or financial institution is typically involved in an all-Bitcoin real estate transaction, the seller or sellers’ legal representatives must perform KYC/AML checks on a prospective purchaser (including AML check on the purchaser’s Bitcoin wallet).  This is necessary to make sure that the “title” of the purchaser’s Bitcoin is clean and that the purchaser’s name does not appear on any of the sanction lists, including SDN, OFAC and PEP lists.  Services like IdentityMind platform offers flexible KYC / AML compliance solutions.

It would be highly undesirable for the seller to accept Bitcoin for his/her million-dollar property in New York and later find out that the Bitcoin’s title is tainted, e.g., Bitcoin transfer was sent from a digital wallet that was added to OFAC’s Bitcoin blacklist.  No title insurance company would insure a seller against these risks.  Proper due-diligence is a must.

Escrow Issues

When a buyer and seller execute a contract of sale, the buyer generally pays 5% to 10% of the purchase price as a down payment.  The seller does not receive those funds immediately. Rather, they are held in escrow by a title company or attorney until closing.

In New York, for example, any person who stores, holds or maintains custody or control of virtual currency on behalf of others must obtain a BitLicense. Applying for a BitLicense is a highly complex and expensive undertaking.

The statutory language does not expressly exclude licensed New York attorneys from the BitLicense requirement.

In addition to uncertainly with the BitLicense requirement in New York, today most title companies and lawyers may not want to hold another person’s virtual currency for both legal and security reasons.  The issue of custody, or how to safely store digital assets, has kept institutional investors on the sidelines.

There are several out-of-state trust companies that provide escrow solutions for storing digital assets.  Before enlisting services of an out-of-state escrow agent, it is important to understand, among other things, the process the company uses to store digital assets (“cold” vs. “hot storage”) and if the company is insured against loss and theft of virtual currency in the event of cyber-attacks.

Price Volatility

In the span of 30 days from mid-November to mid-December 2017, the price of Bitcoin more than doubled, from less than $8,000 to more than $19,000. Over the next 30 days, the price fell back to under $12,000. Each of these major price fluctuations occurred within the time it normally takes to go from signing a contract to closing in a fast-paced real estate transaction.

And virtual currencies remain volatile—between August 1 and October 25, 2018, the price of Bitcoin has been as high as $7,700 and as low as $6,000. Ethereum, another popular virtual, started August at $420 and ended the month at $284.

This volatility makes it impossible to know at the time a contract of sale is signed how much a Bitcoin will be worth at closing. As a result, it would generally be imprudent for a buyer, agent, or others to commit to a fixed amount of crypto as payment.

The parties to a sale could try to avoid this problem by closing immediately (or promtly after the contract of sale), which may be problematic for properties requiring extensive due diligence or approval periods.

However, if a buyer and seller are insisting on specifying the contract price in Bitcoin or tying the price to the Bitcoin exchange rate at the date of contract, it may be critical to include a clause to address potential fluctuations in the price of Bitcoin between the contract and closing dates.

Tax Issues

Taxable gains from exchanging Bitcoin for real estate. In most real-estate transactions, a seller anticipates that he or she will have to pay income taxes on any gain realized from the sale. But in an all-Bitcoin transaction, if a buyer is a U.S. tax resident, he/she must also be prepared to pay income tax as a result of the transaction.

In an all-Bitcoin real estate transaction, both buyer and seller may face undesired tax consequences. As a result, either party may be unwilling or unable to enter such a sale. Below are some examples.

The IRS treats virtual currencies like Bitcoin as personal property. That is, the sale of real property for Bitcoin is not a sale of property for money, but an exchange of one type of property (Bitcoin or other cryptocurrency) for another (real estate).

In such exchanges, both buyer and seller must pay income taxes to the extent the fair market value of the property received exceeds their adjusted basis in the property surrendered. In other words, the buyer may have to pay income tax even though he or she never exchanged his or her Bitcoin for dollars, and so never had “income” in the sense most people think of.

Inability to qualify for a 1031 exchange. An all-Bitcoin transaction may also prevent a seller from deferring recognition of gain in a 1031 like-kind exchange. These are often structured as “deferred exchanges,” in which the purchase price is not delivered to the seller but held in escrow until the seller closes on a new property of like kind.

But, as discussed earlier, very few (if at all) 1031-exchange qualified intermediaries may be willing or know how to hold virtual currency in escrow, meaning that it may be impossible for a seller to complete such an exchange to satisfy the requirements for IRC Section 1031.

In that event, the seller will have to recognize any gain from the sale of the property. This complication makes it almost impossible for any seller interested in a 1031 exchange to accept cryptocurrency as payment.

Transfer Taxes and Title Insurance. Other tax issues may further complicate an all-Bitcoin transaction, including liability for transfer taxes (such as the Real Property Transfer Tax in New York State and New York City, as well as NYC’s “mansion tax”) and federal and state withholding taxes if a transaction involves a non-US-resident seller, which must be paid strictly in USD.

Option 2: Bitcoin-USD Real Estate Transaction – Efficient Alternative for All Sellers and Buyers

Sellers unwilling to accept Bitcoin for their real property can request a buyer to convert his or her Bitcoin to dollars that in turn would be used to cover the purchase price down payment, remaining closing balance and expenses, including title insurance premiums and transfer taxes.

If a buyer is from the US, he/she can convert Bitcoin to dollars using a licensed payment processor like Coinbase.  For example, a buyer’s Coinbase account would be connected to the buyer’s bank account in the US.   The US dollar proceeds from the sale of Bitcoin would be deposited in such buyer’s bank account.

If a buyer is not from the US, it can be challenging to open a bank account in the US to convert the buyer’s Bitcoin holdings to dollars.

However, attorneys who can complete a proper due diligence on the buyer and, more importantly, the buyer’s digital wallet and the source of Bitcoin, can facilitate the transfer of Bitcoin into US dollars through Coinbase.

Conclusion

Offering to accept Bitcoin as payment may provide sellers with an advantage among investors with substantial Bitcoin holdings and a desire to move those holdings into real estate.

Engaging in such offerings will require the seller and his or her representatives to understand the options of executing real estate transactions using Bitcoin and the various methods for converting Bitcoin into USD.

With such an understanding, plus appropriate legal and tax planning, sellers can set their listings apart and attract purchases using the billions of dollars currently held in Bitcoin.

___________________________________________________________________

This article is provided for your convenience and does not constitute legal advice. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.

Reference List

[1] Adam Ludwin ,How Anonymous is Bitcoin?, Coin Center, Jan. 20, 2015 available at https://coincenter.org/entry/how-anonymous-is-bitcoin

[2] Jason Weinstein, How can law enforcement leverage the blockchain in investigations?, Coin Center, May12, 2015, available at http://coincenter.org/entry/ how-can-law-enforcement-leverage- the-blockchain-in-investigations

[3] Jason Weinstein, How can law enforcement leverage the blockchain in investigations?, Coin Center, May12, 2015, available at http://coincenter.org/entry/ how-can-law-enforcement-leverage- the-blockchain-in-investigations

[4]Jerry Brtio, Comments to the Federal Elections Commission on Techological Modernization, December 2, 2016,  http://sers.fec.gov/fosers/showpdf.htm?docid=353998

[5] Hearing Before the Senate Homeland Security and Governmental Affairs Committee, Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies, Nov. 18, 2013, available at https://www.gpo.gov/fdsys/pkg/CHRG-113shrg86636/pdf/CHRG-113shrg86636.pdf  – quoting Jerry Brito

[6] HM Treasury, UK national risk assessment of money laundering and terrorist financing, October, 2015, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/468210/UK_NRA_October_2015_final_web.pdf

[7] FinCen, Applications of FinCen’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, Mar., 18, 2013, available at https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering

This article is provided for your convenience and does not constitute legal advice. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.

OUR LATEST ARTICLES

14 Key Considerations When Launching a Security Token Offering

This article is provided for your convenience and does not constitute legal advice. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.

Read more
Compensating Team, Consultants and Advisors with Tokens: Issues to Consider

Since 2017, companies utilizing blockchain technology to raise funds through security token offerings (also referred to as token sales, ICOs or token generating events) have made a qualitative leap toward compliance with the securities laws while selling their tokens to U.S. investors.

Now, majority …

Read more
The SEC’s Tomahawk Order: ICO Marketing Doomsday?

On August 14, 2018, the U.S. Securities and Exchange Commission (SEC) issued an order against Tomahawk Exploration LLC (Tomahawk) and its principal, David Thompson Laurance (the “Order”), regarding an ICO for Tomahawkcoins that Tomahawk …

Read more

REQUEST CONSULTATION