Tesla Announces that Consumers Can Purchase Vehicles with Bitcoin

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Tesla Announces that Consumers Can Purchase Vehicles with Bitcoin
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In the penultimate week of March 2021, Tesla announced that the company would allow consumers to purchase vehicles using bitcoin. The news comes months after the company announced that it was investing substantially in bitcoin to enable the company to have cryptocurrency liquidity. Tesla is not the only major company that is involved in bitcoin. PayPay announced in 2020 that millions of its merchants would be able to buy and sell cryptocurrency.

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The Tesla news comes as bitcoin prices have eased off their all-time highs. Despite the pullback in bitcoin's value, a crypto investment in the most liquid currency pair would in March of 2020 would have allowed an investor who transacted in dollars to generate a 1,300% return.

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Conceptually the idea of purchasing a Tesla with bitcoin sounds great. Unfortunately, there are several issues related to these sales. These issues include the potentially taxable event. In its Payment Terms and Conditions, Tesla only accepts exact amounts and only provides a small time-window to make a payment.

Tesla's Announcement

Tesla announced on March 24 that consumers that wish to pay for a model S, 3, X, or Y could do it with bitcoin. CEO Elon Musk announced that the company had started letting interested buyers pay for their electric vehicles in bitcoin via Twitter. Before the announcement, the company has begun to acquire bitcoin, and it appears the car manufacturer has no plans to convert the cryptocurrency to fiat.

Paying is Easier Said than Done

While the concept of paying for a car in bitcoin appears to be a good idea, the nuances of crypto make it challenging to take advantage of this option. For example, according to Tesla's Bitcoin Payment Terms and Conditions, bitcoin transactions must be completed within a specific window of time, or else the price in BTC expires, and the buyer must ask for a new one. Given the volatility of bitcoin, this scenario could quickly be challenging to accomplish. Imagine you agree to pay 1-bitcoin for a Tesla car on April 30. According to sources, you only have 30-minutes to make a payment. You have so little time because the volatility of bitcoin will make it so one party might not want to go through with the transaction if the exchange rate moves. If bitcoin's exchange rate moves from $59,000 when you agree to the vehicle's price to $62,000, you will be unwilling to purchase the car for 1-bitcoin.

Another issue with paying with bitcoin is you cannot get any change. Tesla will only accept exact amounts and will not reimburse payments sent to an incorrect alphanumeric address. So if the company request 1.1 bitcoin and you pay 1.2, you will be stuck paying a higher amount for the car. Additionally, if you pay the wrong address, you will not be able to get credit. The Tesla Bitcoin Payment Terms and Conditions says, "IF YOU INPUT THE BITCOIN ADDRESS INCORRECTLY, YOUR BITCOIN MAY BE IRRETRIEVABLY LOST OR DESTROYED."

Taxes Can be an Issue

The Tesla Payment Terms and Conditions do not discuss whether a vehicle's purchase is a taxable event. The payment using cryptocurrency by U.S. buyers could generate a tax issue. Under current policy, purchasing goods or services is considered a taxable event regardless of the transaction size. This scenario means that car buyers must account for potential gains or losses if their bitcoin is worth more or less now than when they first purchased it. For example, if you purchased one bitcoin for $1,000 and used it to purchase a Tesla when the value of bitcoin is $50,000, you will be on the hook to pay capital gains taxes of $49,000 to the IRS in the U.S.

Bitcoin Opportunity Costs

Lastly, there is an opportunity cost to purchasing a vehicle with bitcoin. Since there are a finite number of bitcoins that can be created and the value has been moving higher, if you sell your bitcoin for a car, you are giving up the potential upside that you might gain from this investment. Since a vehicle is a depreciating asset, where the price declines the second you move it off the lot, you are swapping a potentially appreciating asset for a depreciating asset.

The Bottom Line

The news that Tesla is accepting payments in bitcoin is exciting but comes with several pitfalls. The biggest issue for U.S. investors is that the payment is a taxable event. The Terms and Conditions make the window of time that you have to make the payment for your new Tesla very small. Lastly, if you make the wrong payment instructions can also lose all the money you used to make the payment.

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Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at AnkurShah47@gmail.com
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