In this Blog we discuss some means and methods to help you avoid the taxes on your cryptocurrency gains or income. By creating a company or a trust in a country resulting in you to pay less tax, you can reduce your tax burden. THAT IS, BY USING A TAX HAVEN WE MAY HELP YOU SAVE TAXES AND MEET OTHER GOALS. WE CAN SET THAT UP FOR YOU LESS THAN US$10,000. For example, if your crypto gain is $100,000 you will likely pay tax on it at over $30,000. As a result we could save you $20,000 in this scenario.
Crypto Gains Are Taxable
Many cryptocurrency investors in Canada and the United States are not aware that their gains and profits made in their cryptocurrency investments are taxable (see our October 2020 Blog). BUT YOUR GAINS ARE TAXABLE AND THEY MADE BE TAXABLE AS INCOME (AND THEREFORE A RATE POTENTIALLY OVER 37% (in the US) and OVER 48% (in Canada). AT THE VERY LEAST THEY WILL BE TAXED AS A CAPITAL GAIN.[1]
Many crypto investors assume that if they trade their cryptocurrencies through a wallet located outside of the US or Canada, they avoid tax. THAT IS NOT TRUE. In both the US and Canada you are taxed on your worldwide income.[2] Therefore whether you trade your crypto currencies through a platform or exchange located outside of Canada or the United states, does not make a difference, you are still subject to tax on that income or capital gain.
However, there are means and methods for you plan your affairs to avoid or diminish the taxes payable by you. By saying this we do not mean tax evasion. TAX EVASION is illegal. TAX AVOIDANCE is not illegal.
Below we discuss different methods to avoid the tax you may otherwise be required to pay in Canada or the Untied States on your cryptocurrency profits.
Are the governments focusing on taxing cryptocurrencies?
The simple answer is yes. The Internal Revenue Service (the “IRS”) has started the initial processes to audit the gains made by US crypto investors.[3] As well, the IRS has added to its 1040 Form that you are required to fill out. In this Form 1040 you are asked:
“At any time in 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency”[4]
Similarly in Canada the Canada Revenue Agency (the "CRA) has started its audit process into Canadian investors crypto involvement.[5] As well, the CRA has commenced gathering information from crypto exchanges.[6] The IRS likely has the same authority and will likely do the same. In one case the CRA has asked Coinsquare for the names of all it’s clients. Through this means the tax authority can find out who is trading in cryptocurrencies. You can expect that when they get your name, the tax authority will come knocking on your door if you did not disclose crypto trades or did not pay taxes on your crypto gains.
Obviously for various reasons an audit by the taxing authority should be avoided. Firstly, it is a serious offence not to accurately completely your tax return. Secondly, given the complexity and confidentiality of crypto transactions, even your ability to comply with IRS or CRA may be compromised.
If an audit by your taxing authority occurs you should expect to be asked to provide:
1. The date and time each unit of virtual currency was acquired;
2. The basis and fair market value (the “FMV”) of each unit at time of acquisition;
3. The date and time each unit was sold, exchanged, of otherwise disposed of;
4. The FMV of each unit at the time of sale, exchange, or disposition, and the amount of money or the FMV of property received for each unit;
5. Explanation of the method used to compute basis relating to the sale or other disposition of virtual currency.” (Note that this refers to the accounting method);
6. All correspondence, (e.g., emails, texts, tweets, etc.) with all counterparties to any virtual transactions; and
7. Follow-up information.
Answering these questions can be difficult. As well, bear in mind that it is each trade that is analyzed (not just when you convert the cryptocurrency to cash or remove it from your wallet). Therefore when you convert your Bitcoin to Ethereum. That will be a taxable transaction. You have to be prepared to report that trade in your income tax return or during your tax audit. There are platforms out there will assist you with that.[7] If you can not show it the IRS and CRA can simply “assume” a gain that it believes you earned. Not a good result.
The Solution: Use of Offshore Entities
The solution is for you arrange your affairs to avoid some or all of the tax imposed by the IRS and CRA. One method is creation of an offshore company or offshore trust.
While it is true that a taxpayer is required to declare all of his/her worldwide income it is also true that a taxpayer is entitled to “tax plan”. The taxpayer can arrange his/her financial affairs to minimize tax within the law. That is, tax avoidance is allowed.
JZ Law has experience in developing tax plans for clients that constitute “tax avoidance” and not “tax evasion”. On most occasions the tax plan needs to be put into place as soon as possible. Once your tax return is filed, it is almost always to late to review your financial affairs and develop a tax plan. THE DATE FOR FILING IS FAST APPROACHING. JUST GET ON IT NOW.
While each person’s financial affairs are different (and an individual review is required), our approach is to move your crypto business (really that is what it is—a business) to a more beneficial location for tax reasons and other reasons. The benefits will not be only based on the tax consequences but other factors as well. In the end the goal will be find a way to MINIMIZE YOUR TAXES and meet your other goals.
JZ Law has experience using what are commonly referred to as offshore entities or tax havens. These are commonly set-up as offshore companies or offshore trusts which see the Canadian or US resident incorporate or become the shareholder or beneficiary of a trust located in the offshore country (we will refer to these as “Offshore Entities”). Through the use of Offshore Entities the following can be obtained:
1. Tax reduction: Many countries in which Offshore Entities are created are located in countries having little (5% or less) or no tax. Saving the investor often over 30% of the taxes he/she would otherwise pay;
2. Privacy: Many countries in which the Offshore Entity is created have privacy legislation. Therefore it is illegal for them to release the names of shareholders, investors, beneficiaries, or others to any outside body (including a foreign government). Therefore, unlike the situation we will see in the Coinsquare case discussed above where investors names will be revealed, if the crypto account was opened by your Offshore Entity the CRA or IRS cannot be provided the names of who owns that company. As a result your anonymity is maintained; and
3. Asset protection: Many offshore jurisdictions provide protection from seizure of assets. Often Offshore Entities will be used by investors to protect their assets from seizure by government, creditors, or even their spouse.[8]
The cost to set-up an Offshore Entity is normally between US$5,000 to $12,500—depending on the complexity and requirements. As well, there is an annual maintenance fee of between US$2,000 to $5,000 to maintain the offshore countries reporting requirements. The structure can be set-up such that:
1. You can still trade your cryptocurrency through the Offshore Entity; and
2. You can repatriate the currency back to Canada or the US.
The Safety: Aren’t There Pirates in the Caribbean?
Not to get political here, but in some respects our governments are no different than the pirates of years gone by-- pillaging our pockets for all of our coins.
Today the Caribbean (the location of most the countries we chose to use) is as safe as anywhere else. The “tax haven” countries, such the Cayman Islands, Bahamas, Barbados, British Virgin Islands, and St Lucia are stable countries. As well, it is important to focus on where the elite and well-off are depositing their wealth, we use those countries too.[9] Rest assured the elite will not allow those countries to be affected.
For your own “investment” into the countries, by using a law firm such as JZ Law you receive the confidentiality protection of essentially all communications with your legal counsel and you will have the comfort of knowing that you are dealing with a “real person” and a law firm with assets and insurance if something goes wrong. That is you protected by using North American legal counsel.
Won’t My Foreign Crypto Exchange/Trading Platform Protect Me?
Many crypto investors assume that their identity will not be revealed by their Crypto Exchange or Trading Platform (we will simply refer to them as a “Crypto Exchange”). That is incorrect. Your information can be obtained from any Crypto Exchange who’s locating country (and every Crypto exchange has a locating country) is a member of the Organisation for Economic Co-operation and Development (the “OECD”). The OECD’s 37 members are: Austria, Australia, Belgium, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Therefore any Crypto Exchange having its location in one of these countries in most instances will be required to deliver any information held by them (including your name). For Crypto Exchanges locating in other countries although they cannot be compelled to produce the information requested by a country, that country will carry a “big stick” by being able to shutdown any activities within its borders.
As we see from the exposure of names resulting from the CRA Coinsquare information request, your name and information is available to the taxing authorities. It is not recommended that rely solely on your Crypto Exchange to protect your identity. They have your name and other confidential information which it appears the taxing authorities can get their hands on. Through the use of the Offshore Entity that can be avoided.
Recommend Locations for Crypto Exchanges to Use
As stated above, your privacy does not appear to be protected by the Crypto Exchange you trade on. However, we do recommend that you choose your Crypto Exchange carefully. One method we foresee the governments of the world will use to easily attach taxes to the gains made through trades is to require the Crypto Exchange to withhold a portion of the funds for taxes. Therefore we suggest you use a Crypto Exchange located in a country which does not tax crypto transactions. This will not avoid you being taxed in Canada or the US (hence you will still need to tax structure discussed above),but it should avoid the taxes being withheld upfront at the time you execute the trade.
The crypto tax-free countries are: Bermuda (and other Caribbean countries), Belarus, Germany, Hong Kong, Malaysia, Malta, Portugal, Spain, Singapore, Slovenia, and Switzerland.
Conclusion
Many of us are seeing gains made through our insights into the cryptocurrency world. Unfortunately, as always, the taxman will come looking for his share. You are not required to give the taxman whatever he asked for. You can manage your affairs to avoid or reduce tax. JZ Law has systems in place which can help you create a structure which will reduce your tax and provide other benefits.
The first step is contact us at Jzanglaw@gmail.com or by text or call to 403 680 9264.
Footnotes: [1] US: https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies Canada: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html [2] US: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion#:~:text=If%20you%20are%20a%20U.S.,%2C%20and%20%24107%2C600%20for%202020%29. Canada: https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents/5013-sa.html [3] https://news.bitcoin.com/irs-cryptocurrency-owners/ [4] IRS Form 1040. [5] https://www.forbes.com/sites/ktorpey/2019/03/06/bitcoin-investors-targeted-with-audits-by-canadas-federal-tax-agency/?sh=1a50ff08656e [6] https://nationalpost.com/news/politics/cra-goes-after-client-details-of-major-canadian-cryptocurrency-marketplace-in-battle-against-underground-economy [7] See for example: https://bear.tax/ [8] https://www.washingtonpost.com/news/wonk/wp/2016/04/19/how-the-worlds-wealthy-hide-millions-offshore-from-their-spouses/ [9] See for example the jurisdictions of companies in which George Bush and Dick Cheney apparently were involved with: https://www.irishtimes.com/business/bush-cheney-face-questions-on-tax-havens-1.1090597
