IRS Bitcoin
Christian Reeves

The IRS smells blood in the water over Bitcoin!

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The IRS smells blood in the water over Bitcoin and it’s coming hard for Coinbase users. The war on cryptocurrency is just getting started and it’s going to get ugly fast. Expect US citizens with US crypto accounts to be put in jail to send a message to the rest of us to fall in line.

The IRS says that only 0.2% of Coinbase users reported a gain or a loss from cryptocurrency on their returns. The government reviewed 500,000 accounts and found only 900 of them had properly reported transactions on their US returns.

The IRS has ruled that Bitcoin and cryptocurrencies are property. That means each and every trade of crypto results in a capital gain or loss that must be reported on Schedule D. Cryptocurrency is treated like stock and not as a currency for US tax reporting.

So, if you bought Bitcoin and exchanged it for Ethereum in your wallet, that trade is taxable. Each time you sell Bitcoin, you have a taxable gain. Anyone who’s buying and selling in their wallet has transactions that must be reported. Every time you use Bitcoin to buy something, you have a taxable transaction requiring you to report the conversion of the crypto into dollars.

Even if you have a net loss, each and every trade must show up on your Schedule D at the end of the year. You also need to keep accounting records to prove your purchase price (basis) and any expenses you incur.

The fact that only 0.2% of users are in compliance has the IRS on the hunt. The Service wants to know about each and every transaction and will make examples of many Coinbase users in 2018. Typical IRS modus operandi is to hang a pelt on the wall in each big city and each State for the press release. Expect the first charges and indictments to be announced around April 10, 2018, just in time for tax filings.

Also, keep in mind that all IRS reporting requirements apply to US Bitcoin transactions. If you pay someone a salary in crypto, you must report it on Form W-2 and withhold the employee’s taxes and pay over federal and state payroll taxes. Doing this will require you to convert from crypto to US dollars, which generates a capital gain.

The same goes for payments to independent contractors. You must file a Form 1099 on any payment of $600 in rents, services (including parts and materials), prizes and awards, or other income payments.

And don’t get your hopes up that Bitcoin in exchange for services will be taxed as a capital gain to the recipient. When you receive crypto for personal services, the coins are magically converted from capital assets to ordinary income in the eyes of the IRS. Thus, you will pay ordinary income tax to the IRS and your state on any Bitcoin earned from work or services.

The last time the IRS was so excited about taking money from it’s citizens was 2008. The Service issued a John Doe summons to offshore bank UBS, just as they did to Coinbase in 2016. When the offshore banking battle was over, the IRS had netted over $10 billion in new taxes, interest, and penalties.

The IRS is really pulling out all the stops in this case. They’ve hired Chainalysis, a provider of Anti-Money Laundering software, to search out Bitcoin users. As reported by Fortune, “In a letter to the IRS, the co-founder of Chainalysis says the company has information on 25 percent of all bitcoin addresses and that it deploys millions of tags to help track and identify transactions.”

The IRS says only 0.2% have reported capital gains on their US tax returns. What should the remaining 99.8% do to minimize risk and tax costs?

If you have unreported crypto gains from 2014 to 2017, you should hire an expert to amend your return. Crypto capital gains are treated like stock transactions, but only a CPA or EA experienced in these transactions is qualified to amend your return.

Amending your returns before the IRS targets you will reduce your risks and penalties. If you’re caught in an audit, expect the full weight of the Service to fall on you.

If you want to maintain some semblance of privacy in your crypto transactions, I suggest you move your coins offshore. Form an offshore LLC, corporation or trust, and open a foreign wallet under that entity. If you need asset protection and estate planning, go with a trust. If you operate a business, use a corporation. Casual investors should form an LLC.

If you’re with Coinbase, you should sell and transfer cash offshore through your bank (a taxable event). If you’re with another firm, you might transfer crypto offshore (usually not taxable).

  • Remember that we’re talking about privacy and asset protection. Moving offshore doesn’t reduce or change your US taxes.  

There are two ways to legally avoid US tax on your Bitcoin transactions. You can invest using a retirement account or you can move to the US territory of Puerto Rico and qualify for Act 22.

If you have a US IRA or 401-K that’s vested, you can form an offshore IRA LLC and move that account offshore. If you’re defined benefit plan can be converted into an IRA, you can also move that offshore. From here you can buy cryptocurrency or any other investment allowed for within the IRA rules.

If you move to the US territory of Puerto Rico, and qualify under Act 22, you will pay zero capital gains tax on your Bitcoin transactions.  Note that this tax deal is only available in Puerto Rico for assets acquired after you become a resident of the territory. It does not apply to your current crypto portfolio.

For more information on Puerto Rico’s unique tax incentive programs, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs. Keep in mind that US citizens are taxed on our capital gains no matter where we live. Foreign countries can’t match Puerto Rico’s offer.

I hope you’ve found this article on why the IRS smells blood in the water over Bitcoin to be helpful. Please contact me at info@premieroffshore.com to be connected to an expert in amending tax returns with crypto gains or for information on structuring your affairs or your retirement account offshore. 

Best ICO for 2018
Christian Reeves

The Best ICOs for 2018

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The ICO market went on a wild ride for 2017. Over 75% of the ICOs that were funded blew up and hundreds of millions were lost. Here’s where I see the ICO market going and which will be the best ICOs for 2018.

Nearly $2.5 billion has been raised through October in ICOs worldwide, with the majority of that coming in the first half of 2017. Then the US government stepped in to take it’s cut and regulate ICOs. This put most US ICOs on hold and is pushing the market offshore.

There are now 3 ways for US investors to get in on ICOs:

  1. Anyone can buy utility tokens,
  2. Accredited investors can buy equity tokens in the US, and
  3. Anyone can buy in to offshore ICOs.

The SEC has said it will not regulate utility tokens. Thus, anyone can buy these investments and the business need not incur all kinds of legal fees to put the token forward.

A utility or use token is one that gives you a right to use a service or receive a product. For example, if Lyft were to issue a use token, you would receive the right to a certain number of rides in exchange for your cryptocurrency.

The same applies to those selling a product. You give the company cryptocurrency and they promise to give you a product when it becomes available. Invest in a new  high tech suitcase company, they use the crypto to finish and produce their first product, and you get a suitcase at a discount if and when it becomes available.

Use tokens are basically the crowdfunding sites like Kickstarter and Indiegogo. The only difference is that you’re exchanging cryptocurrency for a token. That token entitles you to use the service or receive a product in the future.

Equity tokens differ from use tokens in that they give you a right to some of the company’s future earnings. Equity tokens act like a share of stock in that they give you some level of ownership and control over the company. Rather than a right to use a service or receive a product, you get a right to ownership and a share of the profits.

The US SEC says that, if you issue an equity token, the US government can regulate and control the transaction. As a result, the costs of most ICOs in the United States have increased by hundreds of thousands of dollars to millions of dollars in some cases. Only the largest companies can now issue ICOs in America.

Finally, the US government says it’s a crime to sell bitcoin outside of a licensed and regulated exchange. If you sell your coins without an exchange and in such a way that the IRS can’t track and tax the transaction, you’ve committed a crime and can be put in jail.

As a result, Americans are moving their coins offshore and true startups will be forced to issue their ICOs offshore. If American investors want to get in on the ICOs with the most potential, those truly in the beginning stages, then we will need to look abroad from here on out.

Keep in mind that there are no laws that prevent US citizens from buying offshore ICOs. The SEC doesn’t allow foreign ICOs to market into the United States. But, if you can find the right offshore investment, you’re free to deploy your capital as you see fit.

Of course, when you invest offshore, the task of due dilligence – checking out the investment – falls to you. Uncle Sam and a swarm of lawyers have not vetted these transactions. This keeps the costs are lower, opportunities greater, and the need to research falls to you.

With all of that said, I believe the best ICOs for 2018 will be offshore. More specifically, I believe the best ICOs for 2018 will be offshore financial technology companies operating banks or proving unique blockchain services to international financial entities.

As legacy banks fight to keep cryptocurrency from taking over, they’re closing accounts and forcing customers offshore. For example, the US is waging an all out war on cryptocurrency and Hong Kong is closing accounts, putting exchanges out of business.

As in any war, there are winners and losers. The winners in this battle are offshore banks that can efficiently convert from crypto to FIAT. Those with blockchain systems and zero cost transfers are especially interesting.

  • A bank that sends international transfers over blockchain, and avoids SWIFT, can do so with zero or little cost.

Banks that can raise money through an ICO, or have an ICO platform for their clients, will be especially valuable in the near future. The bottom line is that blockchain and cryptocurrency are the future of offshore banking and early adopters are excellent investment opportunities.

If you’re an accredited investor and would like information on offshore crypto banks and FinTech opportunities, you can reach me at info@premieroffshore.com. I will be happy to introduce you to quality international banks.

If you run an offshore bank, our would like to form a new crypto focused international financial entity, you might find my 300+ page book on the topic helpful. See Offshore Bank License Guide, 2017, available on Amazon Kindle.

Privacy Flag Offshore
Christian Reeves

Top two max privacy options to plant your flag offshore

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The last few months have seen a striking increase in demand for offshore residencies and investments. Americans are looking to diversify out of the dollar, move their assets abroad, and to plant as many foreign flags as possible before the year end. Here are the top two max privacy options for 2018.

Because of the political climate in our country, Americans are renouncing US citizenship at record rates. In the third quarter of this year, 1,376 Americans renounced their US citizenship, putting the annual tally on pace to beat 2016’s record. That’s a 26 percent increase from 2016’s total of 5,411 – which was itself a 26 percent jump from 2015.

Those who are planning on burning their blue passports, want to diversify and create a safety net abroad, or wish to build an escape route and landing spot should things go badly, need to plant as many flags offshore as possible. The hottest offshore plans this quarter are:

  1. A second residency in a low or no tax country that leads to citizenship and a second passport, and
  2. Belize is suddenly the most active real estate market for those seeking personal freedom. This is a very new development and can be summed up in one word – Bitcoin!

Here’s where to get a second passport or second residency and why Belize has become the hottest offshore real estate market out there.

Second Residency Programs

There are two ways to acquire a second passport: you can buy it or you can earn it over time. You can buy a passport from a country like St. Lucia for $125,000 (single applicant) to $300,000 (family). St. Lucia is the lowest cost quality passport for purchase.

If you want a top tier passport, or don’t have an extra $250,000 lying about, you can earn a second passport through residency. Get a residency visa, maintain that visa for 5 or 6 years, and you can apply for citizenship.

The best top tier residency program Portugal. This country’s golden visa program get’s you EU residency, which means you can live and work anywhere in the Union during your residency. You can apply for citizenship and a passport after 6 years of residency.

You can get residency in Portugal by depositing money in a local bank or with the purchase of real estate. The most popular option is to deposit € 1,000,000 into a bank in Portugal (you don’t need to spend or invest it, just hold it in the bank). You can also buy any property for at least € 500,000 and get residency. If you buy a property that’s 30+ years old or located in an “urban renovation” area you need only spend € 350,000.

The best low cost residency program is Panama. If you’re from a “friendly nation,” you can get residency in Panama with an investment of just $20,000. You can then apply for citizenship and a second passport after 5 years of residency.

The investment must be made into one of Panama’s approved reforestation programs and covers the entire family. That is, only one investment is required for a husband, wife, and dependent children 18 years and under. Legal and government fees apply per person.

If you’re not from a friendly nation, the best residency program with a path to citizenship is Nicaragua. Anyone can apply, no matter your country of citizenship and the investment is only $35,000. Legal and government fees are higher than Panama, about $10,000 per person.

The big difference between Panama and Nicaragua is that you must spend 180 days a year in Nicaragua to keep up your residency. Panama does not have a physical presence requirement.

Real Estate in Belize

The Belize real estate market has been on fire for the last 2 months. Belize developers are now allowing buyers to pay 100% of the purchase price and all fees in cryptocurrency. For those looking to get their coins out of the US and away from the IRS, real estate in Belize provides an excellent opportunity to trade Bitcoin and diversify out of cryptocurrency.

Most of the buyers in Belize have been early adopters of Bitcoin. Those with significant gains and a desire to diversify out of cryptocurrency. Belize provides the best, and often the only, way for these investors to exchange coins for property.

The reason Belize and crypto have gone so well together is that Bitcoin’s original business model of privacy and security is what Belize has been about from day 1. Belize is one of the last tax havens standing where personal privacy is a natural right.

As Bitcoin grew, government’s perverted the original intent, but early adopters can still find a libertarian and (nearly) tax free existence in Belize. This country doesn’t tax capital gains and won’t ask you to report your holdings or your transactions.

Conclusion

For the above reasons, the top two max privacy options to plant your flag offshore is a second residency in a low or no tax country and buying real estate in Belize with your appreciated cryptocurrency. Both have seen major increases in demand this quarter and I expect them to do even better in 2018.

If you would like more information on second residencies, second passports, or real estate in Belize, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you to diversify offshore. 

protect your IRA
Christian Reeves

Protect your IRA by moving it onto the blockchain

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The new “offshore” is in the cloud. The new asset protection tool is the blockchain. The best way to protect your IRA is by moving it onto the blockchain and behind and offshore structure. Get your retirement savings out of the United States, on to the cloud, and out of the reach of creditors before it’s too late.

As of today, you can freely move your IRA and other liquid assets out of the United States and behind the protective wall of an offshore structure. But, don’t expect this freedom to last long. As the tax reduction plans of President Trump come through, these loopholes will close.

The US will likely reduce US taxes and then eliminate the ability to retain earnings offshore. When that happens, all manner of regulations and new reporting requirements will be unleashed on offshore accounts. Only those who are already offshore will be spared.

You should be grandfathered in and not required to report the transfer. Also, you should not be required to pay any exit tax or transfer tax as we see with intellectual property transfers under IRC Section 482.

In most cases, the transfer of intellectual property to an offshore entity is a taxable event. The IP must be valued and tax paid on that fair market value as if you had sold it to the foreign entity. We expect this treatment to apply to all types of property in the near future.

To support this position, I note that the IRS has already ruled that cryptocurrency is property and not cash or a cash equivalent. This is why they can tax each and every sale as a capital gain. For more on this, see: Tax on Bitcoin Transactions.

In fact, the US government is all over cryptocurrency. The IRS is taxing transactions as capital gains. At the same time, the SEC claims Bitcoin is a currency and thus it has the right to regulate ICOs as it does IPOs.

You can expect the government to close the door to IRA transfers in the near future. If you want to get your retirement account on the blockchain and out of harm’s way, you’ll need to act quickly.

So, how do you get your IRA offshore? How can you move your IRA onto the blockchain? That’s easy enough.

The first step is to form an offshore IRA LLC in an offshore jurisdiction that 1) maximizes asset protection and privacy, 2) won’t tax your transactions, and 3) allows for single member LLCs. We need all three of these to build a proper retirement account structure.

As a result, the number of jurisdictions is limited. We usually work in Nevis, Belize, Cook Islands, and Seychelles. After 15 years in the industry, these countries are the most reliable.

Second, you likely need to transfer your IRA to a new US custodian. All IRAs require a US custodian, even those invested in cryptocurrency offshore. And the large custodians don’t want you investing offshore. They make money selling you their funds, so they prohibit international transfers.

Third, once your IRA is with a custodian that allows for international transfers, you instruct them to send a wire transfer to your offshore wallet or to your international bank account. If you will invest only in cryptocurrency, you might only need a wallet. If you want to diversify, you  probably need an offshore bank account.

Fourth, once you have your structure, an agreeable custodian, and your offshore company is funded, we install you as the manager. You’re responsible for writing the checks or sending the transfers. You’re in control of the IRA and the account grows based on your investment choices.

And that’s all you need to get your IRA onto the blockchain and out of the reach of governments and civil creditors. A proper offshore structure, a US custodian, a quality international wallet or trading platform, and the documents required to install you as the manager of the account.

I should point out that buying Bitcoin in your retirement account will allow you to avoid US tax on these transactions. If you buy and sell crypto within a ROTH, the trades are tax free. If within a traditional account, they’re tax deferred – you pay US tax as you take distributions.

However, if you buy using leverage, you may still have a taxable event. Whenever you buy and sell in an IRA with a loan or on margin, the gain attributed to that leverage is taxable at ordinary rates.

You can eliminate this tax if you’re offshore, but not if you’re investing in the United States. Offshore traders can set up a UBIT Blocker in addition to their IRA LLC and eliminate UBI on their cryptocurrency trades. For more on this, see: What is UBIT in an IRA?

UBIT blockers a very advanced IRA tool only available offshore. Only sophisticated investors should deploy these structures.

I hope you’ve found this article on moving your IRA onto the blockchain to be helpful. For more on setting up an offshore IRA, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

ICOs in the United States
Christian Reeves

What SEC Regulation Means to ICOs in the United States

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The SEC recently issued a ruling that ICOs must be treated as IPOs. This means that ICOs are now fully regulated by the SEC and that all accredited investor rules apply. But, beyond the new compliance costs, what does this mean for the ICO issuer? What does SEC regulation mean to ICOs in the United States?

The SEC’s position on ICOs is simple. If you’re raising money for a business, and the investor is getting something that behaves like a share of stock, then the SEC has the right to regulate the transaction.

Basically, if the transaction bears any resemblance to a security, the SEC says it has a right to control and regulate. If it walks like a duck and quacks like a duck, it is a duck.

Of course this is the SEC’s position. They see billions of dollars being invested without their oversight. A government agency will always try to regulate and interject itself into the industry… they will always choose expand their influence in the name of “protecting investors.” When you’re a hammer, everything looks like a nail.

For more on ICO regulation, and how to tell the difference between a crowdsale which is not regulated and an ICO which is regulated, see: Crowdsale vs ICO.

The first shots in this battle were fired by the SEC in July of 2017. In this ruling, the SEC stated that the DAO token was a security and subject to SEC regulation. When you look at the facts and circumstances of this token, it was an easy case. It operated like a share of stock and was an easy target.

The SEC didn’t file criminal or civil charges against DAO. They just used this company as an example of what a security looks like. As a result, DAO was put out of business with the stroke of the pen.

The SEC was waiting for a much juicier and easier case to charge. They found such a soft target on September 28, 2017. According to a statement released Friday, the US government alleges Maksim Zaslavskiy and his two companies, REcoin Group Foundation and DRC World, defrauded investors and sold unregistered securities in two fake ICOs.

I don’t know anything about REcoin or DRC, and I don’t have to. I know that the SEC looked at a ton of potential targets and found the one they thought would be the easiest prosecution. The government searched all the ICOs and found the one they wanted to make an example of.

The SEC followed this up with the creation of a Cyber Unit… of course they did. We Americans need the protection of the US government in our transactions. Without it, we’d lose everything!

The SEC stated that “the Cyber Unit will focus the Enforcement Division’s substantial cyber-related expertise on targeting cyber-related misconduct, such as:

  • Market manipulation schemes involving false information spread through electronic and social media
  • Hacking to obtain material nonpublic information
  • Violations involving distributed ledger technology and initial coin offerings
  • Misconduct perpetrated using the dark web
  • Intrusions into retail brokerage accounts
  • Cyber-related threats to trading platforms and other critical market infrastructure”

The bottom line is that the SEC is going to regulate ICOs as they do IPOs. Any misstatement in your offering documents, or failing to register when necessary, and the government is coming for you.

What does the SEC’s involvement mean for ICOs in the United States?

First, all ICOs will need to go through serious due diligence by legal and accounting experts. This will greatly increase the cost of issuing a token.

Second, only accredited investors will be allowed to buy US ICOs. I can’t imagine anyone will try to register an ICO in today’s climate, so the pool is limited to accredited investors.

In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. Most estimates claim that about 10.5% of US households qualify as “accredited.”

Third, US investors will need to hold their tokens for at least 1 year before they are allowed to sell. This rule is what will really crush US ICOs. Once liquidity is removed, and the hope of quick bump in the token or currency is lost, I think many who are attracted to Bitcoin will be turned off from ICOs.

Also, this one year rule doesn’t apply to most other investors. This gives foreign buyers a massive advantage over US buyers, especially in such a volatile market.

Here’s a sample of what you might find in a compliant offering document:

THE PCI TOKENS HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY OTHER LAW OR REGULATION GOVERNING THE OFFERING, SALE OR EXCHANGE OF SECURITIES IN THE UNITED STATES OR ANY OTHER JURISDICTION. THIS OFFERING IS BEING MADE (1) INSIDE THE UNITED STATES TO UP TO 99 “ACCREDITED INVESTORS” (AS DEFINED IN SECTION 501 OF THE SECURITIES ACT) IN RELIANCE ON REGULATION D UNDER THE SECURITIES ACT AND (2) OUTSIDE THE UNITED STATES TO NON-U.S. PERSONS (AS DEFINED IN SECTION 902 OF REGULATION S UNDER THE SECURITIES ACT) (IN JURISDICTIONS WHERE THE OFFER AND SALE OF PCI TOKENS IS PERMITTED UNDER APPLICABLE LAW) IN RELIANCE ON REGULATION S UNDER THE SECURITIES ACT. PERSONS PURCHASING IN THE UNITED STATES AS ACCREDITED INVESTORS WILL BE REQUIRED TO MAINTAIN THEIR PCI TOKENS ON COINHUB UNTIL THE FIRST ANNIVERSARY OF THE ISSUANCE OF THE PCI TOKENS AND WILL BE REQUIRED TO MAKE UNDERTAKINGS TO COINHUB IF THEY REMOVE THEIR PCI TOKENS FROM COINHUB THEREAFTER, THEY WILL BE REQUIRED TO AGREE NOT TO SELL SUCH PCI TOKENS TO ANY U.S. PERSON UNLESS THEY SELL ALL OF THEIR PCI TOKENS TO A SINGLE U.S. PERSON. NON-U.S. PERSONS PURCHASING PCI TOKENS WILL ONLY BE ENTITLED TO RESELL THEIR PCI TOKENS TO OTHER NON-U.S. PERSONS (IN COMPLIANCE WITH APPLICABLE LAW) IN AN OFFSHORE TRANSACTION (AS DEFINED IN RULE 902 OF THE SECURITIES ACT). SEE “NOTICE TO SUBSCRIBERS,” “TRANSFER RESTRICTIONS” AND “RISK FACTORS.” THE ISSUER WILL NOT BE REQUIRED TO, NOR DOES IT CURRENTLY INTEND TO, OFFER TO EXCHANGE THE PCI TOKENS FOR ANY SECURITIES REGISTERED UNDER THE SECURITIES ACT OR ANY OTHER LAW OR REGISTER THE PCI TOKENS FOR RESALE UNDER THE SECURITIES ACT.

This language is for sample purposes in my article and is not intended as legal advice. Don’t copy it into your document!

Fourth, once the SEC is up in your business, they bring with them many different rules. Issuing a token will not be as simple as putting some language in your document and only accepting accredited investors.

These transactions will now involve compliance with Act 33, Advisers Act and the  Investment Company Act. Moreover, the SEC will assert the right to protect investors. If your business doesn’t go as planned, be sure that the government will be looking to put a few more pelts on its wall to assert its dominance.

As a result of these regulations, I expect only the largest and most traditional ICOs to remain in the United States. The more aggressive tokens, with more risk and more upside, will move offshore. Many jurisdictions are crafting new legislation, and most will be easier to navigate than the United States.

I hope you’ve found this article helpful. For more information on moving your business out of the United States, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

IRS Targets Bitcoin
Christian Reeves

The US Government is Targeting Bitcoin

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The US government has launched an all out war on Bitcoin and battles are raging on several fronts. The purpose of this war is to either kill Bitcoin so that the dollar remains dominant or, failing that, to control Bitcoin such that the government maximized taxable income and eliminates your ability to transact in private.

It’s early days yet in the war on Bitcoin. But, the writing’s on the wall. The only way for you to salvage some level of privacy is to move your Bitcoin offshore. Set up an offshore company and hold your crypto account in the name of the company.

Here are the 4 primary lines of attack the US government has on Bitcoin today. You can rest assured that new agencies will jump into the fray once they find a way to take what’s yours.

  1. IRS taxing bitcoin as a capital asset and not a monetary instrument.
  2. The SEC treating bitcoin as cash so they can regulate ICOs.
  3. Applying civil asset forfeiture rules to Bitcoin.
  4. Requiring you to report your Bitcoin every time you enter or exit the United States.

Let’s start with the IRS. The Service recently declared that Bitcoin and cryptocurrency are assets, not cash and not currency. This means that, when you exchange Bitcoin for FIAT currency, you must pay tax on the gain.

If you held the Bitcoin for less than a year, you pay short term capital gains tax at your standard rate. This is probably around 35%. If you held the Bitcoin for more than a year, you pay the long term capital gains rate on your profit, which is probably 23.5% (20% if Trump repeals Obamacare taxes). These are the Federal rates and your State will also tax the gain.

Had the IRS classified Bitcoin as a currency, they wouldn’t be able to tax you when you convert Bitcoin to dollars. By calling Bitcoin an asset, the IRS can tax the conversion (or more properly, the sale of the asset).

  • Only currency investments are taxable, such as FX traders, and not basic conversions. That is to say, if you buy foreign currency as an investment, then the gains are taxable.

Then there’s the Securities and Exchange Commission (SEC). If the regulator had determined Bitcoin to be an asset, rather than a cash or cash equivalent, they might not have had jurisdiction to control ICOs. For the reasons why this might have been the case, see: Crowd Sale vs ICO – What’s Legal?

Suffice it to say, if Bitcoin were an asset, all ICOs might have been considered crowd sales and thus outside the purview of the SEC. Of course, this is unacceptable… all investments must be watched over and controlled by our government – so, Bitcoin is cash to the SEC.

To those of us who write on these topics, both of these lines of attack were obvious. Each US agency will define Bitcoin in whatever way allows them to exert control and levy fines to generate more income. That’s the nature of the beast… to a hammer, everything looks like a nail.

Here’s the regulation of Bitcoin that no one saw coming:

Introduced last month, the Combating Money Laundering, Terrorist Financing and Counterfeiting Act of 2017, will force you to report your Bitcoin each time you leave or enter the United States. That’s right, you will be required to fill out a form telling the government how much Bitcoin and cryptocurrency you have each and every time you cross our border.

When I first saw comments on this legislation, I didn’t believe it. I’ve been writing about government overreach since 2000 and still thought this must be an error. It took me days, and a lot of research, to accept that this level of insanity was possible.

When you cross a US border with $10,000 or more in cash or cash equivalents (diamonds, coins, checks, letters of credit, etc), you must report to the government by filling out a form. Of course, filing this form will likely subject you to scrutiny at the airport and unwanted attention from the IRS later.

In most cases, the government has been reasonable in applying this rule. For example, if you’re traveling with collectable coins, you only report if the face value of those coins is over $10,000. So, reporting was generally for those transporting cash and very rarely intruded into the lives of everyday Americans.

The new rules targeting Bitcoin basically allege that cryptocurrency is always with you. Unlike an offshore bank account, where cash is held outside of the US and must be reported once a year, Bitcoin is literally travels with you inside of your laptop. Regulators believe that Bitcoin is stored in your laptop, phone, hard drive, or USB storage device, and is thus crossing the border with you.

This claim that Bitcoin is always with you is key to the government’s attempt to force reporting. If Bitcoin, which is cash or cash equivalent and not an asset in this case, travels with you, the government can force you to report. If it’s cash sitting on the blockchain, and all you have on your laptop are the codes to access that “cash,” no reporting can be required.

That is to say, you don’t need to report how much you have in your bank accounts simply because you’re username and password to access those accounts is stored on the laptop. You can only be required to report what you are physically carrying with you carrying when you cross the border.

And the same law that requires you to report your Bitcoin allows the government to take it from you. Bitcoin will become subject to the asset forfeiture laws. The government can seize your Bitcoin if 1) you fail to report it, or 2) you report it and they believe you obtained it illegally.

Note that I said, they “believe.” The government can take your Bitcoin and then force you to prove how you earned it. The burden of proof falls on you in a civil asset forfeiture case (YouTube video by John Oliver)… and you must be willing to spend big money on lawyers to have any chance of success.

What can you do to protect your Bitcoin?

These are all the ways the US government is targeting Bitcoin. And the only thing you can do to protect your coins is to move them out of the United States and out of the government’s reach. Remember that the US government can seize any cryptocurrency “stored” in a US exchange by issuing a levy or seizure order.

The US government can’t easily seize assets held outside it’s borders. For example, the IRS can levy any bank or brokerage in the US, and any institution that has a branch in the US. So, if you have cash in a bank in Panama, and that bank has a branch in the US, you’re at risk.

The solution is to form an offshore corporation or trust to hold your wallet. Then use only Bitcoin firms located out of the United States… those without ANY ties to the US and can’t be intimidated by Uncle Sam.

The same goes for buying Bitcoin in your retirement account. First, form an offshore IRA LLC. Then move your account into an international bank that doesn’t have a branch in the United States. Then setup an offshore wallet and buy your coins.

I should point out that buying Bitcoin in your IRA is one way to beat the IRS at their own game. Because crypto is an asset, you pay capital gains tax on each and every transaction. However, if you buy Bitcoin in your IRA, you defer or eliminate capital gains tax. Because cryptocurrency is an asset, you can buy and sell it inside an IRA.  For more, see How to move your IRA offshore in 2017.

The fact that Bitcoin is an asset also means you can take advantage of the tax benefits available in the US territory of Puerto Rico. Basically, if you move to Puerto Rico, spend 183 days a year on the island, and qualify for Act 22, all crypto gains on coins acquired after you become a resident will be tax free. See: Move to Puerto Rico and Pay Zero Capital Gains Tax.

I hope you’ve found this article on how the government is targeting Bitcoin to be helpful. For more information on taking your IRA offshore, setting up an asset protection structure, or moving to Puerto Rico, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to protect your coins and keep more of those crypto profits.