When Bitcoin and other cryptocurrencies popped up, one of the main claims was that crypto was “nowhere to be found” and the “perfect tax haven”. Sadly, those who have embraced this mythology now find themselves forced to make a decision about their future: do they team up and act smarter, or do they keep sticking their heads in the sand and trying not to get caught by the tax authorities?
THE DEATH OF THE SECRET
Over the past year, any concept of crypto secrecy has evaporated. The most public example came when authorities revealed that they had recovered the ransom paid in Bitcoin in the Colonial Pipeline ransomware case. When this happened, the horrified community of cryptocurrency enthusiasts immediately started talking about ways to hide their crypto activity with techniques like ‘mixers’ and more secure cryptocurrencies like Monero, Zcash, Dash, Horizen, Verge and Beam.
A crypto mixer or Bitcoin mixer is an online platform that mixes one owner’s coins with those of other owners or with previously cleaned coins.
The fantasy that mixers are a magic bullet imploded in August when Larry Dean Harmon of Senior Mixer Helix pleaded guilty to money laundering charges. Those who have used blenders should take note that Harmon has entered into a plea deal. It doesn’t take much of the imagination to suspect that his detailed records of Helix transactions are being used as bargaining chips in an attempt to reduce a potential 20-year prison sentence. Of course, Helix isn’t the only mixer the authorities are targeting.
Most other supposedly secure cryptocurrencies suffer from the fundamental flaw that “someone has a record of the transaction” and someone can be put in the same position as Harmon. Monero tries to work around this problem by using “ring signatures” and stealth addresses. The publicity of these features has made it the most popular of the secure cryptocurrencies. Many people believe these features will bring back the promised “invisibility cloak” of crypto. The problem is, Monero is not really secure. Those who believed in the hype and used the product should understand that their past transactions will be discovered.
WHAT IF I PUT MY CRYPTO IN A COLD WALLET?
Then there are those who have decided to ‘go black’ by placing their cryptocurrency in cold wallets and hiding them. Aside from the inability to profit from their crypto holdings, let me point out a few flaws in this approach.
First of all, remember that you bought your crypto somewhere or got it through mining. Each crypto coin is registered on the blockchain. Although the owner of this specific piece is not known, the question can be triangulated and then answered by the tax authorities in several ways:
- If you bought a Tesla or other product or service with crypto;
- If you bought the crypto on an exchange. This exchange now gives tax authorities all the information (such as an IP address) they have about this purchase under a John Doe summons or new regulations;
- If you have traded one crypto coin for another on an exchange, the exchange will also provide information about that trade;
- If you’ve ever bragged online, to a former partner or friend of your crypto business, now all of those people are motivated to collect a big whistleblower prize for whistleblowing you;
WHAT DO I DO NOW?
With the anonymity myth exploding, those who own an undisclosed cryptocurrency are faced with a serious decision, with two paths that can be taken.
Path A: condemn you to play hide and seek with a tax authority which has unlimited time and resources and which is joined around the world by other tax authorities who may also confuse you; Where
Path B: Obtain professional advice for:
a) Prepare a tax-advantaged declaration to the tax authorities to bring you into compliance; and
b) Organize so as to minimize or eliminate future tax payable.
There are national and international tax strategies that are worth exploring in depth. The most appropriate strategy or combination of strategies will be determined by the individual circumstances and approach of the owner of the crypto.
HOW CAN I EXECUTE PATH B?
The key to minimizing the tax paid to comply is the fact that taxing cryptocurrency is still a relatively new concept for both taxpayers and tax authorities. This provides some opportunity to claim a lower potential liability than might be available in the future as the tax rules become more mature.
The correct procedures for voluntary disclosures are complex and vary widely from jurisdiction to jurisdiction. However, the complexity is not a reason to wait, as the tax ramifications of not making a timely voluntary disclosure correctly can be significant. For both of these reasons, it is essential that the person seek and follow the advice of an expert tax advisor.
After becoming tax compliant, the right national solution to become more tax efficient depends on the jurisdiction to which you are subject. Some jurisdictions, such as Portugal, do not currently include increases in the value of cryptocurrency in their definition of taxable income. Other jurisdictions look at how long you have held the particular cryptocurrency before you engage in a taxable event, such as a sale or exchange, or the frequency of your trading activity.
National solutions depend on the use of the applicable rules. This includes benefiting from the reduced rates applied to long-term capital gains, and avoiding being defined as a “trader” subject to ordinary rates. Other strategies, such as sales of laundry products, may be possible, but it should be noted that the US and UK are seeking to ban this strategy. The changing rules on linen sales illustrate a fundamental problem with any domestic solution – the government often moves goalposts without much notice.
Due to this domestic legal volatility, it is increasingly attractive to have an international strategy for immediate implementation or future assurance. This is especially true for people involved in the crypto space, as their operations are completely independent of location. As with national solutions, an international strategy consists first of all in setting up a plan to safeguard nationalities and / or alternative residences. An effective safeguarding plan must take into account the personal and professional needs and preferences of the individual and his or her family. It also needs a “fall-back” component that allows the individual to escape their current high tax situation and migrate to a zero or low tax situation, all without sacrificing their quality as a taxpayer. life.
As with voluntary disclosures and national planning, designing and developing an international strategy is not a do-it-yourself project. Nor is it something that can be cooked up by a commission salesperson that signals a particular product of citizenship or residency.. Success or failure will depend on retaining advisors who are familiar with:
a) How to best exit your current tax jurisdiction?
b) the best way to enter your new country of residence in a tax-efficient manner; and
c) how to select the appropriate residency and / or citizenship statuses that are necessary to implement your departure and resettlement.
The requirement for expert advice is especially important for US citizens, who are subject to taxation based on citizenship. Despite a lot of nonsense on Twitter and Reddit, the responsibility of the United States does not change simply by acquiring alternative residency or even citizenship.
DO NOT DECIDE TO ACT, IT IS TO MAKE A DECISION
Regardless of which tax jurisdiction you are currently in, it should be recognized that the tax authorities are chasing you with guns. The sooner you get past denial, the more steps you can take to make your future brighter.
Those with large undisclosed properties must tidy up their homes before the tax authorities find out. Once the authorities have their name, their options narrow down considerably. However, with proper planning, individuals can not only join, they can also organize themselves legally to reduce or even eliminate future tax obligations on their crypto business.
If you’ve read this far but are still not convinced that the tax authorities are capable or motivated, I suggest you take the time to review the efforts of the tax authorities. If you are still in doubt, I wish you good luck, because you are going to need it.
[More: 3 steps to prepare wealthy clients for higher tax rates]
David Lesperance of Lesperance & Associates is an international tax and immigration consultant.