Tax efficient structure for US cryptocurrency exchange

Tax efficient structure for US cryptocurrency exchange

cryptocurrency exchange tax

Here’s how to cut your corporate tax rate for a US cryptocurrency exchange to 4%. If you’re operating a licensed exchange in the United States, and you’re willing to move some or all of your employees, we can get your corporate tax rate down to 4%.

This article considers a tax efficient structure for US cryptocurrency exchange and is meant for larger exchanges licensed in the United States. It can also apply to international exchanges that require a US presence and US banking services. The 4% rate is a great offer compared to Switzerland and 12.43% in Zug and higher in other cantons.

Note that this tax-efficient structure for crypto exchange doesn’t replace your US licenses. It’s an add-on to your current structure that allows you to pay only 4% tax on corporate profits. Nor does it change any of your compliance or regulatory requirements.

This 4% tax rate applies to corporate tax reportable in your state of operation. For example, let’s say your headquarters is in California and this is where all of your employees are located. Move this headquarters, including all the employees, and you can exchange the combined Federal and state rates of 30%+ (21% federal and 8.84% for a c-corp or 10.84% for a financial c-corp in California) for 4%.

If you’re paying tax in the states where you’re licensed but don’t have employees, these taxes will remain the same. They’re based on being licensed in the state and not corporate income from work performed in California (your state of operation).

Without any more ado, here’s how to create a tax efficient structure for a US cryptocurrency exchange and pay only 4% in corporate income tax:

Move your business to the US territory of Puerto Rico and operate under the International Financial Entity license, or Act 273. Your corporate profits sourced to Puerto Rico will be taxed at 4% and not taxed in the United States. This is not corporate tax deferral available offshore… this is a corporate tax rate of 4% replacing a US rate of 30%.

Income is “sourced to Puerto Rico” if it’s earned from work performed in the territory. Likewise, income is sourced to the United States, and taxable there, if earned from work performed in the US.

For example, if half of your workforce is in California and half is in Puerto Rico, about half of your income might be attributable to Puerto Rico. Thus, 50% would be taxable at 4% and 50% at 30%.

If you move your business and all employees to Puerto Rico, sourcing is a simple matter… all corporate profits will be sourced to the island and taxed at 4%. When you split work between the US and PR, a transfer pricing study and in-depth analysis are required.

  • In practice, sourcing of income will look and the quality of work performed in CA vs PR and is much more complex than this example.
  • For more on sourcing, see: What is Puerto Rico Sourced Income for an Act 20 Business. This post is about Act 20 and not 273, but the sourcing concept is the same.

The corporate profits of your cryptocurrency exchange operated from Puerto Rico will be taxed at 4%. Dividends from the Puerto Rico company to a foreign corporation or non-US person are tax-free. Likewise, dividends from your Act 273 business to a resident of Puerto Rico who qualifies for Act 22 are tax-free. Dividends from the International Financial Entity to persons in the United States will be taxed in the United States.

That is to say, US persons can move to Puerto Rico, qualify under Act 22, and pay zero US tax on dividends from an Act 273 cryptocurrency exchange. You will pay PR tax on the salary you take out of the business and zero on dividend distributions. Shareholders that live in the US will pay US tax on dividend distributions.

For more on Puerto Rico’s various tax incentives, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

To set up in Puerto Rico under Act 273, you will need the following:

  1. Puerto Rico corporation with $250,000 paid-in capital and a CD for $300,000, for a total of $550,000 in capital.
  2. Minimum of 5 employees on the island.
  3. Detailed business plan with projections, operating manuals, and KYC, BSA and AML documentation.
  4. Resumes and financial reports on all key employees.

With this documentation, we can apply for an International Financial Entity license for your cryptocurrency exchange. You will be granted a permit to organize and given time to build out an office, IT systems, hire your employees, etc.

When you’re ready to go live, you will give notice to government regulators. They’ll come out and review your systems and documents. When you pass the audit, you’ll be given a permit to operate.

An Act 273 license will allow you to move the operation of your cryptocurrency exchange to Puerto Rico and exchange your 30% tax rate for a 4% tax rate.  

I hope you’ve found this article on a tax-efficient structure for US cryptocurrency exchange to be helpful. For more on International Financial Entities, see my 300-page book on Amazon.

An IFE license can be used to set up many different businesses. In addition to a tax-efficient cryptocurrency exchange, an IFE license could be used to operate an international bank, family office, brokerage and FX firm, etc. My book is focused on the international banking components of the IFE, but you will find it useful for a cryptocurrency exchange.

For more on building an International Financial Entity in Puerto Rico, you can reach me at info@premieroffshore.com or call us at (619) 550-2743. We’ll be happy to assist you to redomicile your exchange to Puerto Rico and offer a turn-key solution for Act 273 exchange.

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