Let’s imagine you want to sell a house or apartment and there is a buyer. The only catch: he is willing to pay for it in cryptocurrency. Will you agree to sell? It turns out that this is no utopia: the first transactions have already taken place in Latvia.
There is no denying that the process of selling or buying real estate using cryptocurrencies can be quite tricky for the uninitiated, both in legal and tax terms. Equally important is the question of the security of both parties involved, which is guaranteed, for example, by an escrow account during a traditional real estate purchase process. In a serious transaction such as the sale or purchase of real estate, it is important to consider a number of key factors, including:
- legal and tax aspects, which may vary from country to country;
- the volatility of the value of cryptocurrencies: the best known cryptocurrency is Bitcoin, created in 2009, but thousands of other cryptocurrencies have been created since then. Their value can be very volatile, so it is important to choose so-called stable cryptocurrencies for your real estate transaction, such as one that is equivalent in value to the dollar;
- security of the transaction: the seller of the real estate needs to think how to guarantee that he will receive the promised payment when the real estate is re-registered to the new owner and vice versa;
- asset liquidity: if the cryptocurrency is to be converted into a traditional currency by its new holder after the transaction, the liquidity of the cryptocurrency is important. In general, the most stable and well-known cryptocurrencies are liquid and tradable on any cryptocurrency exchange, but this may require specific knowledge of the field.
What do I need to know if the transaction is carried out in Latvia?
The biggest problem when purchasing real estate in Latvia using cryptocurrency as a means of payment is the lack of trust in this form of payment – most property owners do not understand what cryptocurrency is and lack confidence in the transaction. For some, the concept of cryptocurrency is also associated with the underground economy and illegal transactions.
Also in the practice of AVER, a buyer who had Bitcoin worth around EUR 300 000 wanted to buy several apartments but faced scepticism from potential sellers. They were worried not only about the tax implications, but also about potential reprisals from the authorities. This case was one of the reasons why, in consultations with experts from both the Latvian Tax Consultants Association and the State Revenue Service (SRS), we identified the most important issues that potential buyers should take into account.
As in any real estate transaction, the most important details relate to capital gains tax as well as tax on the exchange of cryptocurrency for real estate. The amount of these taxes also depends on whether the transaction involves natural or legal persons and the tax status of the parties involved.
For example, our company is currently acting as an intermediary in a transaction where a VAT-registered company sells a secondary market property – an apartment in a terraced house – to an individual. The buyer wants to pay in cryptocurrency. In essence, this is an exchange transaction: the cryptocurrency, which is considered as a commodity, is exchanged for the apartment. According to the SRS, an individual exchanging a cryptocurrency for an asset, such as an apartment, must pay capital gains tax of 20% on the difference between the value of the cryptocurrency at the time of purchase and the value of the real estate at the time of the exchange. This tax must be paid by the holder of the cryptocurrency to the State in euro. However, a company that is subject to VAT but whose property is not subject to VAT does not have to pay VAT. In this case, the company acquires cryptocurrency on its balance sheet, which must be accounted for accordingly – as stock, reflecting the value of the cryptocurrency in euro on the date of the transaction. Finally, the intermediary invoices for its services – if the intermediary is subject to VAT, the invoice is invoiced with VAT, which the recipient has to pay in euros.
You must also be able to prove the origin of the cryptocurrency
As in any real estate transaction, the relevant authorities are notified: transactions involving cryptocurrency are reported both by the notary and the Land Registry. This is an aspect that guarantees a certain security for the seller: the buyer must be able to prove the origin of his money, in this case cryptocurrency. For example, the buyer has a salary and savings which he once used to buy a cryptocurrency which has increased in value and is now being used to buy real estate. Cryptocurrencies can also be traced for additional security: anyone who knows the address and wallet of a particular cryptocurrency can see how much and how much value that cryptocurrency has sent to someone. Moreover, this information is publicly available.
For properties where the seller is also paying a mortgage, the transaction can potentially be more complicated, as the bank that provided the loan to the property owner is also involved as another party. In such a case, the bank may consider the origin of the buyer’s money to be too complex or may reject the transaction for other reasons.How to ensure the security of the seller and the buyer? One of the most important issues to be addressed in a cryptocurrency and real estate transaction is the security of both the seller and the buyer. While with the euro or other traditional currencies the security is guaranteed by an escrow account from which the money is not transferred to the owner until the land registry registers the title with the new owner or other conditions are met, with cryptocurrencies it is more complicated. Neither banks nor notaries have crypto-wallets yet to store the money at the time of the transaction. However, these issues can potentially be addressed through intermediaries that have solutions for such transactions.In this case, a tripartite contract can be concluded between the buyer, the seller and the intermediary – a real estate agency – and a new cryptocurrency account is opened for the transaction. It is important to specify in the contract the sequence and amounts in which the money is paid to the seller, such as when the new ownership is registered, when the renovations are completed, when the acceptance deed is signed, etc. Overall, although the first transactions have already taken place, the Latvian real estate market is still relatively conservative. Scepticism about the acceptance of cryptocurrencies as payment for sellers is too high for the time being. The segment of new real estate is a positive exception. One encouraging example in Latvia is, for example, Zunda Towers. At the same time, when purchasing new real estate from a developer, it should be borne in mind that this type of transaction in exchange for cryptocurrency is usually only possible in the more expensive segment of the real estate market, where the seller has both the time and the interest to look into the legal and tax issues in order to make it happen.
