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What is Bitcoin?
The world is buzzing with a new asset class called cryptocurrency. This started with the introduction of an open source system called Bitcoin which was launched in 2009 by an unknown group of engineers and a main developer known as "Satoshi." The digital network eliminates the requirement for third parties or intermediaries like governments and banks to create financial transactions. In short, it’s a decentralized store of value due to it's built in transferability, fungibility, scalability and scarcity.
The decentralized payment system is completely based on the internet, where every Bitcoin transaction history can be derived using the user’s anonymous wallet address. Bitcoin uses blockchain technology to decentralize and democratize the accounting ledger. This ledger is checked and modified using multiple nodes, also known as "miners," to validate each transaction (a role that the banks and payment processors traditionally filled.)
Any computing device could in theory be a payment processor on the network. This democratizes the network with tens of thousands of mining devices existing in many locations all throughout the world.
A Bitcoin wallet is extremely secure because it contains a unique public key and a non-public key, which provides proof of authorization and permits the owner to initiate and sign transactions digitally and instantly using any device.
The main downfall currently is the fact that the cryptocurrency's value is extremely volatile because the worth of Bitcoin is influenced by the law of supply and supply in a rapidly growing market. Although the volitility exsits, it's likely to decrease as wide spread adoption continues and the network grows larger.
There are several benefits of using a Bitcoin:
- Good potential for higher growth (10 year average of 200%+ growth in value per year)
- The transactions may be processed at any time with potentially lower fees compared to banks and credit cards
- The transactions are semi-private and secure
- Most importantly, it eliminates the necessity for third parties – banks/government intermediaries.
- Divisibility, one bitcoin can be sold by a single "Satoshi," which is the smallest Bitcoin unit you can find in the market. There are 100 million Satoshis in a Bitcoin (0.000000001 BTC). Think of them as bitcoins version of a penny.
- Scarcity, the maximum amount of Bitcoins that will ever be made is 21 million. Currently less than 19 million are in existance and a portion of those have been lost as well.
There are also a few drawbacks or threats in using bitcoin:
- The cryptocurrency’s worth is extremely volatile
- Cryptocurrency wallet storage face hacking concerns (depending on what type of wallet is used)
- Losing access to wallet assets with accidental loss of passkeys
- U.S. Law treats profits as capital gains
Mortgage loans using Bitcoin:
Bitcoin plays a significant role in the emerging decentralized financial markets, where it serves a lot of functions which include issuing loans against Bitcoin which can help bypass traditional capital gains taxes compared to just selling the coins.
If you are reaching to pay your current mortgage using bitcoins, then all you've got to do is exchange your bitcoins for dollars, then deposit them to your bank account and pay your lender as usual.
However, emerging finance companies are now offering a blockchain-based loans which can be activated or approved in a matter of minutes, rather than watching for the traditional approval of loans where it takes days for the approval. Additionally, it eliminates the high processing fees that are been charged with traditional lenders. The main drawback currently is the amount of reserves required for most Bitcoin lenders, who generally will require 2.5x the amount of assets compared to the loaned amount. For example, if you take out a $100,000 loan you would be required to pledge $250,000 worth of bitcoin as collateral for the loan.
Blockchain enhances smart contracts, where it ensures that each loan seekers and lenders tend to comply with possible terms relating to providing proof of funds and planning for payment. These contracts eliminate the utilization of banks and lawyers by confirming and recording the transactions. Blockchain technology has many benefits to mortgage loans – lower value, high security, time-saving, clear delivery and approach, no third parties concerned, record keeping, simply accessible, etc.
Capital Gains Implications:
The U.S. Internal Revenue Service (IRS), has said that Bitcoin should be treated as an asset or an intangible property and not a currency because it is not issued by a central bank. This treatment of Bitcoin as an asset or intangible property portrays the tax implications on Bitcoin. All kinds of transactions using Bitcoin must be reported, no matter how small in value it is.
A short-term capital gain tax rate is applied on any profits, when bitcoins are held for a shorter duration (less than a year) before selling or exchanging it. This is as same as the ordinary income tax rate. A long-term capital gain tax rate is applied, when bitcoins are held for a longer duration (more than a year) before selling or exchanging it.
Taxpayers in the U.S. are required to maintain a record of all purchases, investments, and selling done through bitcoins to get hold of products and services (that IRS considers as bartering)The transaction becomes a taxable one, if you use bitcoin regularly to purchase items online instead of using cash, as the Bitcoin is converted into an asset, it incurs taxes.
Purchasing Real Assets with Digital Currency:
If you currently have signficate amount of value in Bitcoins, you may be considering purchasing Real Estate assets to diversify your portfolio.
We recommend considering three different avenues to go about purchasing a Real Asset using cryptocurrecy.
- Offer the Cryptocurrency as direct payment of the asset
- Use a fiat loan on the cryptocurrecy
- Sell the cryptocurrency for fiat currency
The first method has a least amount of complications and tax obligations but requires a Seller that is willing to accept cryptocurrency and a escrow company familiar with using cryptocurrency to facilitate the transaction instead of fiat dollars.
If you are unable to negotiate with a seller to directly accept only the cryptocurrency, a smarter way can be utilized to limit these tax liabilities and purchase real assets. This way would be to take out a loan using a site like BlockFi, Nexo, or SALT. Once you receive the loan in Dollars, backed by Bitcoin, you can then use those funds to make the purchase.
If getting a loan isn't up your alley, your last option would be to sell the cryptocurrency and use the proceeds to make the purchase of the Real Asset. The downfall with this method is you would have to use the after-tax proceeds for the purchase.
Interested to learn more or purchase property using Bitcoin? Get in touch with one of our licensed agents. We're happy to help!