Cryptocurrencies in Real Estate Transactions: Taxes and Regulation

With the launch of the $TRUMP cryptocurrency and its rapid growth to a capitalization of over $4 billion, the global crypto market has once again been in the spotlight. Against this background, the issue of using digital assets in traditional financial transactions, especially in the real estate market, is of particular relevance. 

However, the main challenge remains the taxation of such transactions. The high volatility of cryptocurrencies, differences in their legal status in different countries, and difficulties in determining the tax base create uncertainty for both market participants and tax authorities. In this article, we will look at how different countries approach the taxation of real estate transactions for cryptocurrency, what risks exist, and what prospects are open to market participants.

General Approach to Taxation of Cryptocurrency Transactions

In most countries, cryptocurrency is not considered traditional currency but rather a specific type of asset. Depending on the legal framework, cryptocurrency may be classified as follows:

• Investment asset. Treated as property that can appreciate or depreciate, similar to stocks, bonds, or other financial instruments. For example, in the United States, the Internal Revenue Service (IRS) classifies cryptocurrency as property, not currency.
• Digital commodity. Viewed as a tradable good, akin to commodities. Japan and Australia classify cryptocurrency as a commodity that can be bought and sold.
• Payment method. In some jurisdictions, cryptocurrency can be used as a legal means of payment under specific conditions. For instance, in Germany, cryptocurrency may function as a legal payment method in certain scenarios.
• Digital asset. A separate category that combines elements of the previous classifications and is used in countries like Singapore.

Cryptocurrency transactions, including real estate deals, may be subject to various taxes:

• Capital gains tax. When cryptocurrency is used to purchase real estate, tax authorities treat this as a sale of cryptocurrency at its market value at the time of the transaction. If the value of the cryptocurrency has increased since its acquisition, the gain is subject to income tax.
• Personal income tax. Income derived from selling real estate for cryptocurrency is subject to taxation.
• Value-added tax (VAT). In some countries, cryptocurrency transactions are treated as transactions involving digital goods subject to VAT. However, in the EU, cryptocurrencies are exempt from VAT as they are classified as financial transactions.

Taxation of Real Estate Transactions Using Cryptocurrency Around the World

The regulation of real estate transactions paid in cryptocurrency varies significantly depending on the legal and tax frameworks of different countries. For instance, in the USA, cryptocurrency is classified as property, not currency. As a result, cryptocurrency transactions are subject to capital gains tax. Purchasing real estate with cryptocurrency is treated as a dual transaction:

• Selling the cryptocurrency (even if it’s used immediately for payment) incurs capital gains tax.
• The real estate purchase is subject to standard real estate taxes.

In Germany, cryptocurrency is classified as private property, not a financial asset. If an investor sells cryptocurrency more than one year after purchase, no capital gains tax applies. However, real estate cannot be purchased directly with cryptocurrency. Instead, the crypto must first be converted to euros through accredited banks.

Cryptocurrency in Dubai is neither regulated as currency nor as an asset. Transactions involving cryptocurrency are virtually tax-free, as the UAE does not impose income taxes. The only applicable cost is the registration fee for transferring property ownership.

Other examples:

• Russia. Cryptocurrency is considered a digital financial asset (DFA) under the law “On Digital Financial Assets.” It is not recognized as a legal tender for payments.
• Singapore. Cryptocurrency is classified as a digital asset, not as a currency. There is no capital gains tax in Singapore, but real estate transactions, however, are subject to stamp duty, which depends on the property’s value. Companies using cryptocurrency in their operations must pay corporate income tax.

Taxation Issues and Risks in Real Estate Transactions Using Cryptocurrency

Countries are increasingly opening their markets to cryptocurrency transactions but require the market value of cryptocurrencies to be fixed at the time of the transaction. This stems from the primary challenge of cryptocurrencies: high volatility. Cryptocurrency prices can fluctuate by significant percentages within a single day, making it difficult to determine their precise value at the moment of the transaction.

This becomes a problem, for instance, when real estate is purchased with cryptocurrency, but the coin’s value changes significantly between the transaction agreement and the registration of ownership. In such cases, determining the tax base becomes unclear.

Moreover, if the exchange rate is fixed in the contract, this situation could impact the deal. For example:

• If the cryptocurrency depreciates drastically before the transaction is finalized, the seller may find it unprofitable to accept it as payment.
• Conversely, if the cryptocurrency appreciates significantly, the buyer might seek to terminate the deal, as purchasing the property at the agreed rate becomes unfavorable.

For tax authorities, such volatility poses the risk of underestimating or overestimating the taxable base. For the parties involved, it can result in unexpected additional tax obligations.

Challenges in Complying with Tax Laws

Despite the growing popularity of cryptocurrencies, many countries lack clear guidance on how to handle real estate transactions paid in crypto. Tax authorities may classify cryptocurrencies as property, assets, or commodities, leading to various tax implications.

In some cases, real estate transactions involving cryptocurrency can face double taxation. For example:

• If a buyer acquires Bitcoin for $20,000 and its value increases to $40,000 by the time of the transaction, the buyer may owe capital gains tax on the $20,000 profit.
• Simultaneously, the seller may face income tax obligations based on the market value of the cryptocurrency received.

Money Laundering Risks and AML Compliance

The decentralized and often anonymous nature of cryptocurrencies makes them a convenient tool for money laundering. Real estate transactions are particularly vulnerable due to the challenges of verifying the source of funds.

Countries with anti-money laundering (AML) regulations require participants in cryptocurrency transactions to provide proof of funds. For instance, the EU’s 5th Anti-Money Laundering Directive (AMLD5) mandates that cryptocurrency exchanges and wallets report suspicious transactions.

Advantages and Prospects of Using Cryptocurrency in Real Estate Transactions

Despite the challenges, the use of cryptocurrency in real estate opens up new opportunities, and the main one is swiftness. Cryptocurrency transactions are nearly instantaneous, regardless of the geographical location of the parties. The lack of banking intermediaries reduces processing time, and smart contracts on blockchain automate the execution of obligations. For example, traditional bank-based international real estate transactions may take several days, whereas cryptocurrency payments are completed within minutes.

Key benefits:

• Cost efficiency. Crypto transactions are less expensive due to the absence of intermediary fees.
• Transparency. Blockchain technology ensures a high level of transparency, as all transactions are recorded in a distributed ledger. These records are permanent and can be accessed at any time.
• Simplified international deals. Cryptocurrencies facilitate international transactions by eliminating the need for currency conversion and bypassing restrictions of local financial systems.

One of the most promising developments driven by cryptocurrencies is the tokenization of real estate. Properties are divided into tokens that can be sold or rented through blockchain. This enables investors to purchase a fraction of a property rather than the entire asset. For example, an investor can acquire a token representing 1% of a building’s value and receive rental income proportional to that share.

Regulatory Prospects for Cryptocurrency Transactions

As cryptocurrencies gain popularity, international organizations and governments are working toward unified regulations by introducing standardized taxation rules for crypto transactions. For instance, the Organization for Economic Co-operation and Development (OECD) is actively developing global standards for cryptocurrency asset taxation.