A simple strategy to avoid personal liability for cryptocurrency transactions no matter your country of citizenship.
This is for entertainment purposes and not intended to be tax advice.
It’s Tax Season — Markus Winkler
Tax season is here.
It’s a busy time for tax accountants and also a time of concern for many cryptocurrency traders. It can also be a very costly time of year, given the tax implications of cryptocurrency trading for residents and citizens of many developed countries.
For many countries, including the USA, Canada, Australia, and parts of Europe, cryptocurrency transactions are uniquely subject to capital gains tax and the onerous reporting requirements that come with it.
Fortunately, there is a rather simple strategy to avoid the personal tax implications of cryptocurrency trading and potentially avoid capital gains liability altogether.
This strategy, once exclusive to international businesses and the wealthy, is an option now easily accessible to most people.
If common sense prevailed, a reasonable person would assume that crypto-currency, much like traditional fiat currency (euro, dollar, pound) would be treated as money by the regulators, but sadly this is not the case.
Rather cryptocurrency is regulated (in most parts of the developed world) as a capital asset; just as your car, house, and computer are also considered capital assets. This rather peculiar treatment of cryptocurrency as a “capital asset” rather than “money” has significant ramifications for those individuals who buy and sell cryptocurrency in these countries.
The profit and loss on capital assets (from a tax perspective), are determined at the time of sale. This means, for those cryptocurrency traders, each and every time cryptocurrency is sold, a taxable event is created (referred to as a capital gain or loss).
For those individuals who engage in multiple transactions per day and live in one of these developed countries, this can become a very onerous reporting requirement and result in a potentially large tax liability.
The determination of the tax treatment for an individual is largely based on two primary factors: the person’s citizenship and their place of residence.
For most people, their citizenship and place of residence fall into the same jurisdiction — generally, this applies to those individuals that live in the same country they were born in.
As an Individual, whose citizenship and place of residence fall within one of these developed countries, cryptocurrency transactions will likely create taxable events.
Rather, the much simpler strategy to completely avoid personal cryptocurrency taxation is to not transact in your personal capacity.
Individual or “Officer of the Corporation” — Hunters Race
Interestingly, in the eyes of the law, Corporations are afforded similar rights to natural living humans. Corporations have the right to transact, own assets, buy and sell property, and conduct business – as the business deems fit, as a legal person.
Corporations function under what is known as a corporate veil. This is an important distinction that separates the actions of the corporation from the actions of the business owners (shareholders) and it also affords protection to the shareholders from being liable for the corporation’s actions.
A Corporation has many of the same rights as a natural person and more rights than a natural person — under the age of majority (minors are not permitted to enter into legally binding contracts).
Suffice it to say, the legal status given to a corporate entity makes it a very powerful vehicle to conduct business and offers significant tax advantages and asset protection when compared to transacting as a natural person.
As a natural person, our tax liabilities are defined by the jurisdiction we fall into, based largely on our citizenship and place of residence. A person’s citizenship isn’t something that is easily changed.
Whereas, the citizenship of your corporation is something you can easily choose based on careful research to determine the best jurisdiction for your business needs.
When it comes to choosing which jurisdiction to incorporate, you quite literally have the world to choose from.
The Republic of Malta — Blockchain Island (by Micaela Parente)
Made popular in the late 70s and early 80s, offshore corporations are now finding a resurgence and a popular vehicle for online businesses, cryptocurrency exchanges, brokerages, and increasingly cryptocurrency investors.
Technically, any corporation registered in a foreign jurisdiction can be classified as an off-shore corporation. However, not all offshore jurisdictions offer preferential tax treatment. The off-shore jurisdictions we will be looking at that offer preferential tax treatment are also considered tax-havens.
The Tax Havens of the World
There are roughly 195 countries in the world and almost 25% (45) of them are considered tax-havens. The more popular tax-havens most people are familiar with are the ones located on small tropical islands, such as the Cayman Islands, Bahamas, St. Martin, St. Lucia, Seychelles, Turks and Caicos, and Bermuda.
There are the lesser-known tax-havens located in key business hubs such as Hong Kong, Panama, and Singapore.
There are also tax havens in well-established and developed countries like Ireland (see: Google), the United Kingdom, and the Netherlands.
Two jurisdictions worth mentioning for cryptocurrency enthusiasts are The Republic of Malta and Panama.
The Island of Malta, Cryptocurrency Tax Haven – Ferenc Horvath
The Republic of Malta:
Generally referred to as just Malta, this small archipelago of islands is located in the Mediterranean Sea and off the southern coast of Italy. The island has been inhabited since 5900 BC and has a long history of conquest and invasion.
This Republic is also known as “blockchain island” is also likely the most crypto-friendly country in the world. Malta has well-developed cryptocurrency regulation which is likely the reason Binance and other exchanges have chosen this jurisdiction to incorporate their business.
Although Malta does not impose capital gains on long-held digital currencies, it does impose a tax on daily trades, at the rate of 35%, making it an unattractive option for many types of investors.
Malta is an excellent jurisdiction for many types of blockchain projects and cryptocurrency exchanges. However, may not be the most suitable choice for the typical cryptocurrency investor.
Panama, Tax Haven — JACQUELINE BRANDWAYN
Geographically located at the narrow bridge of land that connects North and South America, made famous by the Panama Canal and Panama Hats, Panama has been a popular offshore destination for investors long before Bitcoin was a twinkle in Nakamoto’s eye.
This jurisdiction has corporate tax at 0%, does not tax capital gains, dividends or interest.
Additionally, Panama has minimum reporting requirements, not requiring the filing of a tax return or the creation of financial statements.
For many types of investors, Panama ticks a lot of boxes as a jurisdiction for their offshore business. An additional benefit of owning a Panama company is that it also opens the door to permanent residence in the country.