Cryptocurrency & Its Effect on New York City's Co-op & Condominium Markets
A rare event occurred in November 2021: For the first time, a real estate investor purchased three luxury condominium properties with cryptocurrency.
The first was purchased at 385 First Ave. without traditional loan banking methods. Magnum Real Estate Group sold a $29 million, 9,000-square-foot building in Gramercy Park. As part of the deal, Bitcoin, through Bit pay, was used to pay for the building through an automated clearing program that converted the crypto to currency.
How did crypto affect these transactions? Read on to explore the advantages and disadvantages of buying a luxury co-op or condo with cryptocurrency. But first, we have to determine what cryptocurrency is and how it offers an alternative to traditional currency or bank accounts.
What is cryptocurrency?
Cryptocurrency is a digital asset that appears on a digital ledger called blockchain. More precisely, it appears on a set of servers and is produced as a non-fungible token (NFT) that can be used to buy and sell assets or services.
Can cryptocurrency be traced, or can it remain anonymous?
As a non-digital asset, on a digital blockchain it can be traced, but it can remain anonymous on computer software
What are different names for cryptocurrency?
There are many different types of cryptocurrencies that have to be converted into U.S. currency rates. They include Bitcoin, Litecoin, Ethereum, Dogecoin and Cardano.
What are the benefits of crypto?
In a crypto transaction, a sophisticated foreign investor can close a real estate transaction 24 hours a day, seven days a week. For example, a purchaser could buy a co-op or condo the same day without using a bank or pay wire. Consequently, new tech buyers can close their transactions immediately — as opposed to traditional buyers of real estate, who have to wait 30 to 90 days before closing on a transaction.
What are the disadvantages of crypto?
Crypto is a highly volatile asset that can rapidly increase in value. Unlike traditional currency, its rates can be highly variable, meaning it often costs more to acquire than traditional currency in a standard bank loan situation. Additionally, if cryptocurrency is sold or increases in value, it can trigger long-term capital gains treatment under the Federal Income Tax Code.
Is it possible to buy a condominium or co-op with cryptocurrency?
Yes and no: Generally, cryptocurrency is not, in and of itself, a type of currency that can be used to buy a condo or co-op. Rather, it has to be converted into cash or a bank-type instrument. Notable tax lawyer Steven Ebert of Cassin & Cassin, LLP notes that you can’t pay for real estate — such as co-op maintenance fees or condo common charges — with cryptocurrency.
Furthermore, while you could use crypto to front the deal, the digitalized tokens alone could not pay your mortgage, real estate taxes, closing costs or real estate commissions. All of these items would have to be paid in U.S. dollars.
What does a buyer have to do to use crypto to buy real estate?
In reality, real estate investors and buyers need to convert their crypto to cash or a cash equivalent (like stock or securities) that have cash value in order to finance a sale of any real property, including the purchase of a condo, co-op or townhouse.
What are the tax consequences of crypto transactions?
Under U.S. Code 1001 of the IRS, the conversion of crypto to cash could possibly trigger a profit or taxable gain that may be subject to capital gains taxes. This is because crypto is a sophisticated digital asset that often holds much more value than typical American or international currency.
John Jilleba, a CPA and partner of a Westwood, N.J., law firm, said people “are liquidating crypto to buy real estate.” As a result, this transaction may cause a buyer to be subject to capital gains taxes.
Is the buyer’s property subject to tax on the contract or closing date of the property if crypto is used as part of the transaction?
No. The IRS will not tax the buyer for the real estate transaction at the time of the contract or closing date. The buyer will only be taxed when the crypto is sold or converted into cash. For this reason, buyers should always consult with a tax advisor or CPA before engaging in any crypto transactions.
How would a co-op or condo deal be structured in a crypto situation?
Theoretically, crypto might settle the front end of the deal, but the financed portion of any transaction would still have to be dealt with by the real estate company.
What are the practical consequences for co-op and condo buyers using crypto to purchase an ownership interest in their buildings?
It depends — unless you are a large real estate investor like our original investor at Magnum Real Estate Investment Company. In a recent article, Ebert suggested that condos and co-ops should not indiscriminately seek out buyers to use crypto as a means of financing their transactions because the association’s board members and bylaws might not permit it.
This could then result in the rejection of a large number of prospective members due to the co-op or condo’s business judgment rules, which favor loyalty to board members and community concerns.
How would a real estate contract be structured using crypto as a digitalized payment device?
This is a very interesting and evolving topic. Currently, local attorneys and realtors seem to agree that a regular real estate services contract with addendums would still work. In this situation, the parties would have to include an addendum in their real estate contract specifying the amount of U.S. dollars to be contributed to the deal; the type of crypto service they would be using; and the type of crypto wallet or crypto exchange they have for the deal.
Most importantly, the contract must contain language specifying that the seller and buyer are parties to the agreement and that the seller confirms the transfer of funds using a particular crypto service, such as Bitcoin or Litecoin — in the event that the buyer and seller were to waive using an escrow account because of crypto.
How is crypto viewed by the courts?
Courts view cryptocurrency as an alternative form of currency, as evidenced by a case in the Southern District of New York, Owen v. Elastos, 2021 Wl 586871. In this case, a Singapore company sold ELA tokens as a form of cryptocurrency. However, investor Mark Owens sued the Elastos company for failure to register its tokens as securities, which is a violation of the Securities Act of 1933.
Eventually, the court found that Elastos was a legitimate seller of currency in cryptocurrency through the secondary trading of ELA tokens. This case established federal court precedent, thereby affirming the validity of cryptocurrency as an alternative, non-cash form of payment. Essentially, the court held that crypto was a taxable instrument and subject to income tax.
What does the advent of crypto and blockchain mean for the average real estate investor and purchaser?
Having crypto might make your closing faster and more expedient, but ultimately, you’ll still have to deal with the consequences of converting your digital asset (crypto) to real money or cash — and deal with the volatility of crypto versus the valuation of real currency as well. This could subject buyers to real jeopardy if significant taxes or capital gains are triggered from their luxury real estate transactions.
Then, the real question becomes whether the buyers of the property want to pay a 40% capital gains tax pursuant to the liquidation of their crypto assets.
For this reason, all investors or purchasers of real estate should consult with a qualified tax and real estate attorney or licensed CPA prior to engaging in these transactions. These professionals can review a purchaser’s balance sheet to determine whether crypto might be right for them before moving forward with their co-op or condominium transaction.
- Making Crypto Less Cryptic, How to buy and sell real estate with cryptocurrency, Jonathan Ashbell and Richard Barbara, March 7, 2022 https://www.law.com/dailybusinessreview/2022/03/07/making-crypto-less-cryptic-how-to-safely-buy-and-sell-real-estate-with-cryptocurrency/
- Crypto, Not So Cryptic, Kramarski and Millson, New York Law Journal, January 14, 2022 https://www.law.com/newyorklawjournal/2022/01/14/crypto-not-so-cryptic-southern-district-applies-traditional-securities-law-analysis-to-digital-currency/?slreturn=20220324175345
- Real Estate, Cryptocurrency and Taxes, A.J. Sidransky, March 10, 2022 https://cooperatornews.com/article/real-estate-cryptocurrency-taxes
- Owens v. Elastos Foundation, 2021 WL 586871 (S.D.N.Y. Dec. 9, 2021)