Using Cryptocurrency for a Down Payment or Closing Costs on a VA Loan

Over the past decade, cryptocurrency holdings have skyrocketed. And, the military community is no exception, leading many veterans to ask if they can use these assets to buy homes. While you can use cryptocurrency during the homebuying process, key limitations exist. As such, we’ll use this article to explain using cryptocurrency for a down payment or closing costs on a VA loan.

Specifically, we’ll discuss the following:

•  VA Loan Overview
•  What is Cryptocurrency?
•  VA Loan Considerations: Using Cryptocurrency for a Down Payment or Closing Costs
•  Potential Tax Implications
•  Final Thoughts

VA Loan Overview

For eligible active duty and veteran borrowers, the VA loan offers the below terms:

•  No down payment required
•  No private mortgage insurance (PMI) required
•  Low interest rates
•  Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

However, while the Department of Veterans Affairs guarantees VA loans, it doesn’t actually lend funds. Instead, a variety of VA-approved lenders (e.g. banks, credit unions, and mortgage companies) issue these loans. This means that, in addition to meeting VA guidelines, borrowers must comply with requirements set by individual lenders. Accordingly, we will use this article to discuss cryptocurrency and VA loans in general. You’ll need to discuss specifics with your lender.

Additionally, if the VA doesn’t require a down payment, why would borrowers ask about using cryptocurrency for a VA loan? First, you can put money down with a VA loan as a means of increasing your immediate equity in a home. Second, even if you don’t put money down, you absolutely will need to pay closing costs – often thousands of dollars – with a VA loan. And, many veterans want to use their cryptocurrency holdings to cover these costs.

What is Cryptocurrency?

Before diving into using cryptocurrency with VA loans, we need to briefly discuss this asset. More precisely, we need to discuss this relatively recent phenomenon in the context of the IRS. VA loans – and mortgages, in general – are heavily regulated by the federal government. As a result, lenders look closely at IRS guidance when considering any sorts of assets, particularly newer ones like cryptocurrency.

Phrased differently, it doesn’t matter that you believe that your cryptocurrency holdings should be treated a certain way. What matters is how the IRS views these assets, as that largely informs how individual mortgage lenders will treat cryptocurrency.

According to the IRS, cryptocurrency: […] Is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. However, the term virtual currency is somewhat misleading, as the IRS doesn’t actually consider cryptocurrency an actual currency like US dollars. Rather, it: […] Is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.

Put simply, the IRS considers cryptocurrency to be property – not currency. As a result, lenders will not accept your cryptocurrency holdings as direct payments. That is, if you owe $10,000 in closing costs on a VA loan, you can’t just transfer $10,000 in Bitcoin to your lender. Despite this reality, options do exist to use cryptocurrency to pay VA loan costs, which we’ll discuss in the next section.

VA Loan Considerations: Using Cryptocurrency for a Down Payment or Closing Costs

Asset Verification

During the loan underwriting process, lenders focus closely on verifying your assets. For VA loans, lenders will want to confirm that you have the cash on hand to A) pay closing costs, and B) if relevant, pay your down payment. Typically, this means reviewing checking, savings, or money market account statements to verify funds. For example, if your lender estimates $10,000 in closing costs, you’ll need to submit your most recent account statements verifying that you have at least that amount of cash set aside.

Conversion to Cash

However, if you plan on using non-cash assets (e.g. stocks, bonds, mutual funds, etc.) to cover your closing and down payment costs, you need to take an additional step. Lenders won’t accept shares of Apple or Microsoft to pay your closing costs. Instead, borrowers will need to liquidate these assets, that is, sell and convert them to cash. Once you make these sales, lenders will then verify that the cash has been deposited into one of your accounts.

Cryptocurrency falls into this category. If you have $10,000 in a crypto account, showing a lender that account balance will not suffice. Instead, you’ll need to A) sell your holdings, and B) deposit the funds into a cash account. Lenders will then verify this cash by reviewing your account statements. In this fashion, you can indirectly use cryptocurrency for a VA loan down payment or closing costs. That is, you can convert your crypto holdings into cash and use the cash to pay these items.

The Importance of Documentation

Closely related to asset verification, lenders will demand clear documentation of any cryptocurrency assets. More precisely, lenders will require a clear paper trail confirming that A) you own the crypto holdings, and B) you have converted them to cash.

Unfortunately, most cryptocurrency wallets don’t provide traditional monthly/quarterly account statements like bank accounts. Rather, you’ll need to confirm what sort of documentation your lender will accept. For instance, some lenders may accept screenshots of your wallet for the past couple months. Ultimately, it’s up to the individual lender, so confirm early in the VA loan application process what sort of documentation they’ll need to cover their cryptocurrency-to-cash paper trail requirements.

NOTE: The federal government also mandates that lenders follow strict anti-money laundering requirements. As a result, if you have any large cryptocurrency purchases, plan to document where you received the original funds to make those purchases.

Potential Tax Implications

Prior to selling cryptocurrency holdings to pay for VA loan closing costs, borrowers should also consider the potential tax implications. Due to the fact that the IRS treats cryptocurrency as property, sales are subject to property-related taxes. In other words, if you sell your holdings for more than you purchased them, you will be subject to capital gains taxes. And, depending on how long you held that cryptocurrency, you’ll either pay ordinary income tax rates or the more favorable long-term capital gains rates.

Bottom line, if unsure of the tax implications of a cryptocurrency sale, you should consult with a tax professional. With proper planning and tax strategies, you can at least minimize the tax bill you’ll face for a sale.

Final Thoughts

Unfortunately, borrowers cannot directly use cryptocurrency for a down payment or closing costs on a VA loan. But, if willing to convert your holdings to cash, you can use cryptocurrency sale proceeds for these loan-related costs. However, due to the fairly novel nature of this approach, make sure to communicate early and often with your lender about requirements pertaining to cryptocurrency assets.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.