In February of 2020, Tesla announced that it would begin to accept bitcoin as payment for Tesla automobiles. In a filing with the Securities and Exchange Commission, the company bought $1.5 billion worth of bitcoin to achieve more flexibility to diversify further and maximize returns on our cash. The company is the first major automaker to accept bitcoin, and the $1.5 billion investment will help the company provide liquidity once it begins to accept payments in cryptocurrency. While Tesla expects to start accepting payments from U.S. buyers in the first half of 2021, it does not wish to start to receive payments from Tesla consumers outside the United States until the H2 of 2020.
Tesla’s investment in bitcoin represents an investment of a significant percentage of its cash in the investment. The move generated some concern amongst investors that Tesla’s stock price would become highly correlated to the volatile movements in cryptocurrency. There most recent SEC filing at the end of 2020 showed that Tesla had more than $19 billion in cash and cash equivalents.
Instead of converting the digital coins Tesla receives from purchases into dollars or other fiat currencies; Tesla said it would hold the digital currency and internally handle the crypto transactions. This scenario means that Tesla is betting on long-term investment in bitcoin and will continue to add to its stockpile of cryptocurrency.
Preview of Announcement
Tesla’s CEO Elon Musk has been criticized in the past for inappropriate tweets. In the wake of the announcement by Tesla, there were questions raised around Musk’s recent behavior on Twitter, where he has been credited for increasing the prices of cryptocurrencies like bitcoin by posting positive messages that have encouraged more people to buy the digital currencies. Ahead of the announcement, Musk added hashtag #bitcoin to his Twitter bio, which helped to briefly push up the cryptocurrency price by as much as 20%. He also said on the social medial chat site Clubhouse: “I do at this point think bitcoin is a good thing, and I am a supporter of bitcoin.” Musk also said he has now become the “Technoking.”
The Terms and Conditions
Some issues stand out with the purchase of Tesla in bitcoin. One of these issues is a small window that a buyer has to purchase a car with bitcoin’s offer price. When you are given an offer for a Tesla in bitcoin, you have 30-minutes to make the purchase. The small window is due to the volatility in the price of bitcoin relative to fiat currencies. There are also several “Terms and Conditions” that apply to purchasing a Tesla in bitcoin. These terms and conditions include a line that says that your bitcoin could be lost permanently if you put in the wrong bitcoin address. Additionally, Tesla will not provide change to customers that pay in bitcoin. You need to give the company an exact amount of the time of purchase.
Your Tax Liability
There is a tax issue that is related to the purchase of a Tesla in bitcoin. When you make the purchase, the U.S. government says that you have created a realized gain. It will be your responsibility to tell the U.S. government the price you initially bought bitcoin and compare that price to bitcoin in U.S. dollars at the time of purchase of your Tesla. You will be responsible for paying the U.S. government the capital gains taxes on the profits you made, which are solidified by the purchase of a Tesla. This situation also can be the scenario for any states where there is a capital gains burden. You will also be able to declare a capital loss if you purchase the bitcoin at a higher price. For individuals who purchase bitcoin at very low levels, this tax burden could be significant and should be considered when making any purchase using bitcoin.
The Lemon Laws
When you pay for your Tesla in bitcoin, you provide the company with an option to help make the company money if there is something wrong with your vehicle. This information is spelled out in the “terms and conditions.” The data had to do with the Lemon Laws. Lemon laws differ in the United States by state, but the upshot is that you are entitled to receive a replacement or a refund from the company if you receive a damaged vehicle. Florida law, for instance, stipulates a car buyer has 24 months to make a lemon-law claim to the seller.
So when Tesla sells you a new $50,000 car, you are also receiving a long-term relationship with Elon Musk. That is, you are purchasing his promise to repay cash when the conditions of your state’s lemon laws are triggered. Unfortunately, the way that Tesla has specified this long-term relationship privileges people who pay with fiat currencies over those who pay with bitcoin. In summary, if your Tesla is a dud and your state’s lemon law entitles you to a refund, Tesla says it has the option to pay you back in one of two ways. It will return the exact amount of bitcoins from the time of purchase or it will pay back the $50,000 in U.S. dollars. It reserves the right to choose which, bitcoin or dollars. So if bitcoin declines, you will receive the exact amount of bitcoin back. If bitcoin rises in value, you will likely receive dollars back. This option is worth money to the company and happens at your expense.
The Bottom Line
Tesla announced in February that the company would begin to accept bitcoin and simultaneously announced that it invested $1.5 billion in bitcoin to provide additional liquidity and flexibility to the company. The company is still trying to work out all the kinks in the process. What does seem clear is that buyers need to beware. The terms and conditions favor the company, and there is a tax liability that can trigger capital gains if you purchased your bitcoin at lower levels.