Most of the below are excerpts from our Ultimate Guide to Bitcoin Loans.
Invest in real estate
Many long-term bitcoin holders want to diversify their portfolios into real estate. Investors may be considering buying a home to use as a cash flow rental property. Similarly, existing real estate owners may want to remodel or to make improvements to existing properties. To top it off, the loan approval process for a bitcoin-backed loan with Unchained is generally 95% faster than obtaining a standard mortgage.
Bitcoin mining is extremely resource intensive, demanding large electricity purchases, equipment purchases and constant equipment maintenance. These expenses typically must be paid in a fiat currency. As a result, miners sell much of the freshly mined bitcoin to cover these costs. Bitcoin loans offer an alternative to selling bitcoin to cover these expenses. With a collateralized loan, miners can access the dollars they need to cover their costs, while still capturing the gains from the bitcoin that they earned.
Many bitcoin investors are also entrepreneurs and small business owners.
A strategic loan on bitcoin holdings can allow corporations to
- fund expansion
- free up working capital
- consolidate high-interest-rate debt
Why would I take a bitcoin loan instead of selling my bitcoin?
To answer this question, we consulted with Daniel Winters of Global Tax, LLC:
“Crypto investors have unique challenges concerning their taxes, especially long time investors that have large paper gains. For an early investor interested in generating USD from their assets, selling it at the long term capital gains rate seems an obvious choice.
However, that’s not always the best decision. At higher income levels, the federal long term capital gains rate is 20%, plus an additional 3.8% for a total of 23.8%. When you add state income taxes, the total tax hit can easily reach 30% or higher. In this scenario, an investor with $1,000,000 in long term capital gains may end up with only $700,000 after taxes. In essence, the investor has a 30% cost of capital to cash out to USD.
If appropriate tax planning isn’t done, the investor may actually need to sell additional crypto assets to cover the USD taxes due on the original capital gain. Now, the investor has even more tax to pay, because they have new capital gains from selling crypto to pay the taxes on the original sale.
One alternative is taking out a bitcoin-backed loan. Borrowing against crypto assets is usually NOT a sale, thus no tax is usually due on the transaction. The investor can therefore potentially borrow USD against their crypto, continue to hold their bitcoin, and pay less in interest than the taxes on the capital gains.”