When you see the news, social media or a financial blog, then you would not have missed the next big thing. It is cryptocurrency. World experts are claiming that it is the future of money. It has caught the interest of investors all over the world. New cryptocurrencies, exchanges and blockchain companies are happening every month.
Various entrepreneurs are trying their hand at crypto technology-based businesses. Like any other business, these also need an offshore plan to take advantage of the tax benefits. However, setting up offshore companies have proven to be difficult. Here we discuss the various ways in which the task can be done with a little effort and planning.
A lot of countries are still undecided on how to categorize cryptocurrency and tax them. Bitcoin and other crypto assets remain anonymous. If you see how bitcoin and other cryptocurrencies are designed, you can find that there are no names, account numbers, social security numbers or additional identification information attached to your account.
As a result, governments have started insisting on revealing your cryptocurrency holdings. This has become more pronounced in the United States, and several laws are being proposed that can affect anyone who possesses cryptocurrencies.
This is not good news for people who have amassed a good amount of wealth in Bitcoin and other currencies.
While the offshore plans in other countries would be simple, in the US, it is more complicated. Making considerable progress in such obstacle is difficult as there will be new regulations enforced by the US government due to which residents have to tell their bitcoin assets. It will be similar to FATCA which forces the business people to reveal their bank accounts even if they are in foreign. But this law is still not applicable for individuals.
Recently there has been a case in which IRS has mandated coinbase to disclose about the person who is having a net worth of $20,000 or even more. This has become a massive problem since there a lot of people who have invested their money with coinbase have in the form of Bitcoin and now have a worth of millions of dollars. IRS is trying to get the list in order to imply plain old income tax or considerable capital gains on their Bitcoin assets.
The major problem with bitcoin is that it can be taxed in so many ways. Have a look:
- It is easily qualified for capital gains tax.
- In case you are using it for trading, it would be qualified as ordinary income.
- Bitcoin can also be qualified for business income tax if you use it in your business transactions.
That is the whole reason the US government is trying to stop the use of bitcoin. They have all sorts of reasons such as cryptocurrencies supports terrorism, money laundering, etc. They are using stringent regulations already. Now they are going to slap a high tax component which will hurt a lot of investors.
So in such cases, you cannot undo what has happened in the past. If you have incurred a lot of capital gains, then you will have to pay for that. There is no escape from it.
However, in future, if you transact in bitcoin or any other cryptocurrency, you will need a second passport. You can become a citizen of any country that is lenient on bitcoin and get out from the tax burden imposed by the government.
How to get a second passport?
There are various ways in which you can get a second passport in a short span of time. If you have made a fortune in your bitcoin investments, then even the $1 million price tag for European citizenship by investment is not really a problem.
In 2018, IRS and other government authorities started to focus on bitcoin in a big way. That is why you need to have a second passport if things get worse.
Offshore company to the rescue
Every company is different, and the solution has to be customized. So there is not much general advice for creating the perfect offshore company for your cryptocurrency strategy. However, there are basic rules related to handling cryptocurrency transactions that you can follow. For frequent traders, using an offshore company for crypto trading saves a lot of headaches and also helps in accurately filing correct US tax returns.
The way an offshore company helps the crypto trader is that it turns the detailed tax returns of your crypto to crypto exchange into a single line item of income allocated to you from the offshore company. So you don’t need to attach a lengthy statement of transactions for your return, you’ll need to report only one line of the item. It makes your life easier compared to submitting thousands of lines of unreported trade.
Non-tax benefits of an offshore company
There are also various non-tax benefits for offshore companies. It can be used for trading in non-US crypto exchanges which do not allow US citizens to open an account. Having an offshore company can help traders circumvent these restrictions. These companies provide privacy benefit as well. This acts as another layer of anonymity between the traders and the crypto exchange.
Setting up an offshore company.
Setting up an offshore company can be daunting. This is because you have to trust someone with opening the company in a country you have no experience with. There are high chances of getting cheated. Also, you need to figure out how to report the income correctly in your US tax returns, using one of the complicated tax forms known to mankind.
Countries such as Malta, the Czech Republic, Lithuania, Switzerland, and England have favorable regulations for cryptocurrencies.
With the taxman’s hand reaching out for your hard earned bitcoin investments, it is necessary to find ways to reduce your tax burden. One of the ways to do it is to move to a country with more specific legislation on cryptocurrencies. Setting up your company in a country with favorable regulations for bitcoin will significantly help you in saving your assets.
The smartest thing to do is to follow developments in various countries and find out where your investments can remain safe.