Bitcoin-Rich, Income-Poor — Mortgage Still Possible?

Question

I’m a long-term Bitcoin investor looking to purchase a new primary residence. Since I have no demonstrable income, and don’t want to liquidate my holdings due to tax implications, I was planning on getting a Bitcoin-backed loan and paying cash for the house. Ideally, though, regardless of buying with cash or not, I’d like to finance the home through more traditional methods — buying with a mortgage, paying cash and then mortgaging, paying cash and then getting a home equity loan, etc.

My question is, do I stand a chance financing the house with no verifiable income? Would a bank allow my Bitcoin holdings to be counted as an asset for personal net worth purposes?

Any insight would be appreciated.

Dave Skow · Answer

My question is, do I stand a chance financing the house with no verifiable income? Answer - prob  not

Would a bank allow my Bitcoin holdings to be counted as an asset for personal net worth purposes?

Answer - probably yes  , but not as  qualifying income

Jacob Lapp · Answer

@Ken Sanders

Definitely not a CPA so this might be dumb advice.

But a question that might be worth asking a CPA is could you buy a house with cash in an LLC or trust. You are the primary owner of that “business” aka the house. And the rent is now considered income for your small business?

I believe most lenders will only consider the income from your own business or rentals after 2 consistent years. Part with the cash for 2 years and then refinance once you meet the lenders criteria?

OR

Partner with one of the many people who are low on cash but can qualify for the mortgage?

Just my 2 cents. Good luck!

Joe Splitrock · Answer

You will pay taxes at some point and likely only more in the future. The outrageous appreciation is exactly why taking a little off the table is smart. Bitcoin has not survived a real recession and government regulation is only just beginning. There may be some smart tax moves you could make today. Crypto can currently escape wash-sale rules that securities have to follow. If you were in the 0% capital gains bracket, you could sell some crypto at a gain and not pay taxes. Do this a couple years and you have income on your taxes. You could then repurchase and establish a higher basis, so you are not paying taxes on that piece of gain later.

Keep in mind, the only reason crypto has skated under the IRS radar is low market cap and non tech savvy law makers. This years massive increase in valuation opened their eyes and the administration is studying how to control and tax it.

As others said, you can borrow against the crypto, but you are going to pay a higher rate and watch for clauses that allow them to call the loan.

From the banks perspective, if you are not selling Bitcoin and you have low income, how will you repay the loan? If you had stock dividend or other cash flow, that would be different. Bitcoin is speculative, so it is not a cash producing asset.

Ken Sanders · Answer

Despite the volatility, I’ve averaged about a 200% annualized return on my Bitcoin over the last 9 years, so I definitely don’t want to trade it for another asset AND be taxed on it. With interest rates [still] so low, and inflation being what it is, I’m looking to pile on the cheap debt wherever I can find it!

Interesting that you said it WOULD be counted as an asset. I actually wasn’t expecting that.

Taylor L. · Answer

I haven't seen any mortgage products yet, but I have seen that Coinbase will loan against Crypto. The rate stinks, but it's there. Given the volatility of bitcoin I would be concerned about potential collateral calls if we do have a true market correction.

Joe Splitrock · Answer

They will count Bitcoin as an asset, but it won't count as income. If you have no verifiable income, you will likely not qualify for a conventional loan.

Taxes may not be bad. The lowest long term capital gain rate is 0% and 15% for moderate income earners. If your income is low, now may actually be a better time to sell off some Bitcoin, before regular income pushes you into higher tax brackets. In my opinion capital gains tax will never be lower than it is right now and arguably Bitcoin appreciation this year has pushed it to bubble like highs. I am not saying sell it all, but moving a little into real estate isn't the worst idea for risk management.

One other consideration on the tax. Bitcoin has lost over 30% over the last 30 days. Had you sold 30 days ago, you would have more cash today, even after paying taxes. This is the risk with a volatile asset class.