Controversial Bitcoin investor Brock Pierce has used cryptocurrency to buy a $1.2 million house in Amsterdam. The wealthy former child star, known for his role in “Mighty Ducks,” used Bitcoin as collateral to obtain a $1.2 million loan from Swiss FinTech Nexo for a home, Fox Business reported.
To obtain the mortgage he had to put up more than $3 million worth of Bitcoin, as Nexo hedges against price fluctuations in cryptocurrencies by requiring borrowers to put up at least $2 worth of crypto for every $1 borrowed.
Nexo reported having raised $52 million in a private token sale. On February 27, it announced that it had processed more than $313 million in that seven-month period. It also distributed more than $900,000 to Nexo token holders, representing 30% of its profits in that time.
Nexo pitches its loans as a way to gain access to fiat currency without selling off cryptocurrency—which would create a tax obligation as well as loss of the potential for gains if the cryptocurrency rises in value.
Pierce, who also gained notoriety after Last Week Tonight host John Oliver called him out over his involvement with the launch of the EOS blockchain, said holding onto his Bitcoin investment was a key factor in his decision to take out the loan. “Being able to borrow against one’s crypto assets gives one options, when wanting to purchase a property, and aligns with my philosophy that real estate and tokenization will be a quadrillion dollar market,” Pierce said to Fox News. “I was able to hold on to my crypto and settle the transaction in fiat.”
Avoiding capital gains taxes with this type of loan is not a new practice, says Andrew Kernosky, of Longmont, CO-based Archer Tax Group, a cryptocurrency tax consulting firm. “In a situation where you’re not actually selling the asset, there’s no taxable sale,” he said. “If your loan gets liquidated, then that’s what generates a taxable event.”
There are caveats, Kernosky warned, starting with the fact that the lender has to actually hold the cryptocurrency assets in trust for you, rather than loaning it out.
“It’s important that you have to have a custodian that’s actually going to hold it in some sort of cold storage, and your capital remains your capital,” he said. “As long as you’ve got the ability for control of it, you’re fine. Otherwise it becomes a potential tax evasion scheme. It’s a little bit more nuanced than I think most people understand.”
That’s also why it is important for the borrower to perform due diligence and know the company they are doing business with, Kernosky added. Many of the lenders he has worked with “will have a special earmarked wallet just for your crypto, so there’s no comingling of funds,” Kernosky said.
While the IRS has dealt with these questions when borrowing against stocks, Kernosky noted that the IRS has not addressed borrowing against cryptocurrencies directly, forcing attorneys to “do a lot of extrapolating based on [those] court cases in order to figure it out.”
In addition, the volatility of cryptocurrencies makes this kind of loan more risky than borrowing against stock, as a steep price drop could trigger a margin call or forced sell-off, which would come with tax obligations based not only on the sale of the cryptocurrency collateral, but also on any capital gains made on it before it was used as collateral.
On a million-dollar loan, he explained, if the value of the collateral drops in half, and is sold for $500,000, the borrower would face capital gains on that half-million-dollar sale. But if the amount of cryptocurrency used as $1 million collateral had originally been bought for $100,000, “you’re going to recognize a $400,000 capital gain as well. So, the net total could be $900,000.”