Are you a digital nomad that is investing and trading in cryptocurrency? This article dives deeper into whether or not you’ll need an Offshore Crypto Company to save on taxes.
Investing and trading in cryptocurrency is no longer just a side hustle… it has become the main source of income for many digital nomads.
With the increase in acceptance of crypto as a payment by ever-growing corporations and governments, it can be highly disadvantageous for location independent business owners to NOT accept cryptocurrency payments.
Digital payments have proven to be hugely beneficial for nomadic travelprenuers.
However, cryptocurrency is a fairly new development in the financial system and it is still far away from getting fully integrated into everyday banking and payment structures.
Not only this, but taxation laws around the world are yet to arrive at a common standard for the treatment of cryptocurrency.
Many banks are still averse to allowing crypto operations, citing the high risk involved in these assets. The anonymity benefit of crypto trading can be offset by legal requirements of disclosure and taxes. These issues have caused crypto traders and businesses who are accepting crypto payments to look for ways to solve these issues.
Many high net worth investors have found the solution to be using offshore companies for their crypto trade. Creating a special purpose offshore company for crypto provides many merits.
Advantages of a Special Purpose Offshore Crypto Company
1. Crypto friendly policies
As stated above, there is no consensus about cryptocurrencies among governments. Some are very welcoming of them and want to be front runners in blockchain technology development, while others have negative views about them and some are still in the process of understanding them.
Countries in the first category provide a lot of incentives for establishing crypto trading companies, for example, Estonia, canton Zug of Switzerland, Malta, etc. have easy licensing policies for incorporating crypto companies.
There is a race among such countries to become ‘Crypto Havens’.
2. Crypto friendly banking infrastructure
To have a smooth crypto trading experience, it is imperative to have banks that are supportive of crypto trading.
Your crypto company bank account should allow easy movement from crypto to fiat currencies and vice versa.
There are many non-banking fintech companies providing better services in the crypto trade. These fintechs, like Transferwise, have defiled the gap in the banking infrastructure for small crypto investors.
However, these fintech companies have inherited risks associated with them. For higher amounts of investments, safer options such as Barclays, Goldman Sachs, etc. should be favored.
3. Corporatization of Assets
By forming a separate legal entity for crypto trading, you are making a clear distinction between your personal assets and your crypto assets.
Thus, in any event causing payments from your personal assets such as divorce, personal lawsuits, proprietorship business loss, etc. your crypt assets will be safe from your liabilities.
Similarly, in the event of loss in crypto trade, your personal asset would be safe. Considering the risky nature of crypto trade, this is a significant reason to establish a crypto company.
4. Tax savings and ease of compliances in tax documentations
There are a lot of differences in the tax treatment of cryptocurrencies. Some countries treat them as financial assets subject to capital gains tax, while others treat them as currencies.
Crypto-friendly tax countries are countries with zero or low taxes on crypto trades. These countries don’t subject the sale and purchase of cryptocurrencies to VAT or sales tax.
Also, they have zero or low capital gain tax on the gains arising from crypto investments. You can check out our detailed list of crypto-friendly tax countries here.
Reporting of income from crypto trade can be a very tedious task especially for countries where trading in crypto requires reporting of every single transaction separately on the tax form.
For example in the US, both exchanges of fiat to crypto and exchange of two different cryptos are taxable events, requiring separate disclosure.
Unlike stock trading, where information can be easily generated, for crypto trading, every single transaction has to be reported individually. But using an offshore company in a crypto-friendly country can be avoided.
The income earned from the offshore company will only be a single item on your income tax return. (Income under Subpart F for US taxpayers in case crypto trading is a regular business activity). Further, you can change the nature of income earned from the offshore company from dividend to salary or commission.
Cryptocurrencies are well known for their nature of being anonymous. This attracts many investors for various reasons. However, while converting cryptocurrency to regular fiat currency or filing tax returns, this anonymity is lost.
Even the devices used for crypto trade can be traced by sufficient tracking methods. This causes grave concerns about the privacy of crypto traders.
Using an offshore corporate account for transacting in cryptocurrency is a good solution for this problem. Secondary layers of privacy can also be applied by using multiple entities incorporated in the different crypto-friendly countries, using one for investment and the other for trading.
This will cause tracing the crypto trade back to you more difficult as multiple jurisdictions will be involved.
6. Countries with crypto-friendly businesses
If you base your crypto trade in a crypto-friendly environment where other businesses and public services accept crypto payments, it will increase the liquidity of your investments.
Instead of having to constantly convert your cryptocurrencies to fiat for payments of expenses, you can directly pay in crypto. This reduces transaction costs and improves the usage of crypto.
Many crypto-friendly countries are allowing payment for bills, taxes via cryptocurrency. Purchase of property using crypto is also permitted, and Vanuatu is the first country to accept Bitcoin payment in exchange for citizenship.
But then a question arises as to which country is the best for opening an offshore crypto company. Even in crypto-friendly countries, there are varying advantages and disadvantages for every benefit stated above.
Each of the above advantages has to be compared for various crypto-friendly countries in order to find the perfect jurisdiction for your offshore crypto company.
It should be noted the above advantages vary from case to case on the basis of size, nature, and use of the offshore company. The factors which affect you the most based on your needs have to be given more weight.
IMPORTANT THINGS TO KNOW
Apart from looking at the usual factors while looking for countries for tax havens, finding the perfect ‘Crypto Haven’ requires some additional considerations as follows:
1) Zero tax or low tax
Both capital gain tax and VAT have to be taken into consideration. Apart from tax directly related to crypto, other taxes such as withholding tax on remittance and dividend distribution tax should also be considered.
2) Costs of incorporation
Just like in the case of regular offshore companies, offshore crypto companies also have incorporation costs.
Apart from the regular costs, crypto companies also need to obtain various licenses for trade-in crypto in a majority of countries if you are involved in crypto trade on behalf of others.
The time consumed and costs of obtaining the license have to be compared for various crypto havens.
These licenses include Cryptocurrency Exchange License, Broker’s License, Financial Services License, Money Management License.
3) Compliance requirements and costs associated with them
Crypto havens, like tax havens, are bound by several international compliance standards. This compliance may require you to disclose your crypto holdings and trade details affecting the privacy of crypto trade.
Offshore crypto trade attracts CFC rules, whereby you are required to furnish adequate information about foreign earnings in your tax return in the home country.
Thus, rules of both offshore company countries and the home country have to be considered.
4) Political stability
There are a lot of extreme opinions about cryptocurrencies and their advantages and disadvantages among countries. Some view them as a threat to national and international security.
The view taken today about them can be changed in the future due to any geopolitical reason or change of government.
Thus, political stability in the country has a huge role in determining the country for offshore companies, at least for now.
As you can see, there are a lot of factors involved in the above process, so it is better to have the help of a professional expert like us in this decision-making.
The actual registration process of an offshore company is much more complex, requiring very niche expertise and research. Lots of documentation, such as memorandum and articles of association, have to be filed.
Registers of details of directors, shareholders, etc. are also required to be filed. There are various fees – both one-time and annual, having to be paid on time, and failure of which can be disastrous.
We have provided a separate blog on the registration of offshore companies which you can read more about here.
With regards to crypto trading companies, there are various other documentation requirements for licenses and compliance forms, each of which is different in every country. It is a very time-consuming process to comply with all the details of the law, and we are here to help you with that.
Offshore crypto companies can be highly beneficial for crypto traders and digital nomads alike. However, to get the optimum benefit out of them, a lot of in-depth research is required in selecting your new Crypto Haven and using it as a base for your crypto trade and investments.
Message us to help you get started!
Do you want professional help with your own International Tax Strategy and Corporate Structure?
Check out our current services. We are here to guide you and help you navigate through the complex world of International Taxes and Business Structures.
We hope you have enjoyed this article. If you have any further questions please leave us a message below and we’ll get back to you as soon as we can.
NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.