Technology has made it possible so that anyone with a bank account and internet connection can get access to any market with a few clicks whether its buying stocks, investing in precious metals, or trading in cryptocurrency.
These same advantages allow people who live and work in one country to conduct business in another instantaneously. This global movement of goods and capital gives individuals the opportunity to make the most of local laws in foreign jurisdictions.
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Financial centres offer corporate structures that allow individuals to live in one country, trade in a second country and hold assets in a third. This gives businesses corporate structuring advantages that come in the form of reduced regulations and financial reporting.
This offshore arrangement gives traders and investors in digital assets and cryptocurrency a number of benefits that can not be found if you incorporate and hold all of your assets domestically in a single country.
In this article, we will explore why going offshore with your cryptocurrency or bitcoin portfolio is worthwhile as well as some of the current challenges financial institutions and banks are facing in integrating crypto into the global market.
We will also take a look at how to create a global offshore company structure that will allow crypto traders the ability to achieve a higher level of asset protection, privacy, and tax efficiency in comparison to holding and trading crypto domestically.
Blockchain is a perfect example of new and upcoming tech with the potential for major disruption in the global movement of finance. By creating a publicly-viewable, distributed ledger for storing data and transactions, it provides the ability to counteract many of the shortcomings present in our current financial and digital systems. With numerous countries leveraging its transparency and programmability for their central bank digital currencies, it’s clear that it will play a big role in the future of finance.
Cryptocurrencies are digital assets secured by a cryptographically linked blockchain. They come in the form of Coins or Tokens and are used principally as a medium of exchange (although the utility of these assets goes far beyond the scope of this article).
One of the key differences between “virtual” cryptocurrencies and digital currencies is that they are not directly linked to fiat-based monetary systems. This is not to say that they don’t have value but rather their value is not predetermined by existing legal-tender. This means cryptocurrency markets are subject to a great deal of volatility in price.
For both investors—seeing the potential for radical growth—and traders—seizing the opportunities the intra-day volatility brings—it’s easy to see how one can capitalise on cryptocurrency markets.
There are a number of issues faced with cryptocurrencies worldwide and they can be split into two main categories: security and regulation.
It makes sense that because this technology is so new and it’s global implications so vast, those making the regulation haven’t had the time yet to form their standpoint on it. Although it can vary greatly from country to country, most cryptocurrency opportunists will face various difficulties.
It shouldn’t come as news that the legislative bodies that make regulations are slow-moving and often fail to keep up with the rapid development of technology. In most countries an official standpoint on cryptocurrencies is far from finalised, which means that while crypto-operations might be tolerated, regulations can change very fast and very drastically.
This has happened recently in the US with the sudden KYC proposal on all crypto wallets and the blanket bans in countries like India and Nigeria — all these proposals were submitted and planned to be put into action in a matter of weeks, not months.
As an individual investor or trader, it is easier to adapt your own strategy to the changes as they happen, than say, a crypto-based company. Yet still, it requires being constantly aware of what your country of residence's standpoint is, where you are trading, and where you are storing your assets while predicting their next move — not an ideal scenario.
Although cryptocurrencies are becoming more accepted in (and even sometimes offered by) the world of traditional finance, for the most part it can be difficult to get a bank account that will permit cryptocurrency operations. Either the banks provide their own cryptocurrency services and wish not to enable their competition or they simply deem these asset classes to be a poorly-regulated asset with too high of a risk for their customers.
Similar to governments, many banks can change their stance seemingly-overnight, refusing to transact with crypto-exchanges, meaning needing to change banks with short notice just to send or receive fiat. This is especially tedious if cryptocurrencies serve as your primary income.
In most parts of the world, gains on increased valuation of assets (aka: capital gains) are a form of taxable income. This means that as an investor or trader, any profits on your cryptocurrency holdings will be taxed under either income or capital gains, as per your country’s laws on cryptocurrencies.
Filing your taxes on cryptocurrency transactions can be a very tedious process depending on where your domestic residence is. For example, in the UK and the US the approach is that taxes are applied not just when selling crypto to fiat money (ie: when cashing out), but rather any trade from one asset to another is a taxable event. This means that if you’re performing hundreds or even thousands of trades from one crypto to another per year, these all need to be reported individually. Therefore, profit margins and the precise fiat value at the time must be known for each and every trade!
This also works at a disadvantage for investors because this can work out in many scenarios more expensive than just paying one lump tax sum. Imagine you close a position from one asset for a profit and then convert those funds into another asset that makes a loss. The trade in profit still requires tax to be paid even though you might not have that money anymore. This often requires investors to sell more of another asset to cover their taxes, which itself is taxable.
Professional traders can often find themselves in murky tax waters too as most are likely to also be holding some crypto-assets whilst also trading them. In some countries this can be unfavourable as capital gains and income tax brackets will be shared.
So you may quickly come to realise that your hard-earned gains will be heavily eaten into and your modus operandi is at risk of changing on a whim. Well, turns out it isn’t like this everywhere. There are some foreign jurisdictions that go beyond tolerating cryptocurrencies and instead embrace them.
Some countries, like Estonia, saw the potential of blockchain early on and incorporated the technology into their government’s data systems. Other governments, like those of Iran and Venezuela, are mining Bitcoin to provide some stability amidst their economic crises. Then there are those countries implementing a CBDC (Central Bank Digital Currency). The list of the jurisdictions beginning to adopt “virtual-currencies” goes on…
Most importantly though, there are a number of countries which have embraced cryptocurrencies as a new era of tech not only for their own uses but for all on their shores too. This has led to crypto-friendly regulation for both corporate and retail markets. What’s more is that these countries tend to be those with an established history of international business and foreign corporations, which brings other benefits too.
Different countries will offer different benefits and so it’s not a one-size-fits-all solution. Still, in almost all crypto-friendly jurisdictions, these are the most common benefits available to cryptocurrency companies:
Having a well-established, pro-crypto stance has helped the economies of many offshore jurisdictions. While regulation is never a fixed thing, on these shores you can be sure that there won’t be any sudden, radical changes to regulation, that is known to happen elsewhere.
In all our recommended offshore crypto havens there will be numerous financial services available to you that don’t shy away from cryptocurrency operations. The full range of offers you’d normally expect from a bank won’t be rejected to you because you’re “high risk”.
Crypto primarily sets itself out to be a revolutionary way to handle digital payments and yet people mainly purchase it as an investment, thus making it relatively illiquid. One of these reasons is due to the restrictions many countries place on paying with cryptocurrencies and the conversion to fiat.
In crypto-friendly countries this barrier is made as unobtrusive as possible meaning it’s much easier to actually pay for services using crypto. Examples include, buying property, paying for bills, goods or services. Very handy if you’re aiming to have as little fiat as possible.
Under the name of a foreign corporation in a crypto-friendly jurisdiction, it suddenly becomes a lot easier to file your crypto taxes. Gone is the need to report each and every trade. You can also arrange your corporate structure so that the company pays your profits as a lump salary, saying goodbye to individual capital gains tax.
There are still a few favourable offshore jurisdictions that are both a tax haven and are not part of the CRS (Common Reporting Standard), meaning your taxing arrangement with that government stays confidential and is not internationally transmitted.
Forming a corporate entity in the form of an IBC, Foundation, Trust or other entity in a foreign jurisdiction creates a separation of powers between you and your assets. Why is this important? If you have a lawsuit or any legal trouble, divorcee, if a creditor comes after you or are maliciously targeted then having a separation of powers, by placing your assets in a corporate structure makes a distinction between your personal assets and the assets that are held by the corporate entity.
For more information on how to legally hide your assets go here.
While it is largely assumed that cryptocurrency is completely anonymous, that is not entirely the case. While crypto and anonymity is beyond the scope of this article, you can be traced, through chain analysis, your IP address can be easily located, most exchanges now require KYC identification, and most importantly and what we will focus on is when you change your crypto into fiat currency you will enter back into the traditional banking system.
When converting crypto back into fiat currency you will need to do that through a bank account and the bank records every transaction that is made and the person who makes it. Having a bank account that is opened by a corporate entity in a jurisdiction overseas effectively keeps your personal name off of any transaction records that are made. This ensures a level of privacy that otherwise would just not be available if you were making transactions with your own name.
A second layer of privacy that we usually recommend is whereby the corporate entity that has the bank account is owned by a Foundation. What this does is remove beneficial ownership which otherwise could be tied to you. A multi-jurisdictional arrangement, whereby you have two corporate entities, with one owning the other not only gives you increased confidentiality, but it also provides a second legal system (of the country you incorporate) that acts as another layer of security. To gain access to those assets or accounts requires that the suit be brought forward into a local court where the assets are held. This prevents all but the most determined creditor from getting to you.
For more information on security and using an offshore wallet for crypto go here.
You are likely to find that banking regulations, the list of crypto favourable countries, the types and number of banks engaging in crypto too change dramatically and quickly as institutions and regulators shape policies.
Currently, there are a few banks both in the US and around the world in places like Dominica or Estonia where it is possible to open crypto accounts, though generally, people are using fintech solutions and EMI institutions such as Revolut and Skrill.
There is still a lot of mistrust within the traditional banking industry, as bitcoin and crypto are major disruptors to the traditional banking model so major changes are still yet to be seen as most institutional banks are wary of the high volitility.
There are several countries that are crypto-friendly destinations that have friendly legislation in place, that have banks where you are able to open an account easily enough, and tax-friendly policies that make it easier to not have to pay outrageous capital gains taxes on your crypto profits (or none at all).
Some of the top countries that we use to establish offshore companies are
For more information see here to read about the best crypto-friendly countries go here.
For most, it might sound like taking your crypto operations offshore is something only accessible to businesses with a dedicated legal team and seems like a lot of work.
This is not quite the case. In some instances, you can get completely set up without even setting foot in the country.
When it comes to what plan to follow for the maximum benefits, this will vary greatly from person to person depending on your needs, where you live and the passport you hold. An effective offshore plan needs to be tailored to your requirements.
For US persons the benefits gained by forming an offshore company for crpto assets, maybe less than a non-US person, largely because of FATCA which effectively ties an individual to his/her worldwide income and forces US citizens to report all foreign holdings. However, going offshore may still make sense and provide some value. As was described above a taxable event is on every crypto trade which makes reporting incredibly onerous, an offshore company can simplify this process as profits can be attributed to the company itself rather than tied to you individually, which reduces your reporting requirements, although this DOES NOT reduce your overall tax burden.
For individuals who live outside of the US, are not US citizens or passport holders, they stand to benefit more, due to the differences in their tax laws and their need to report foreign income. However, this may not be the case with all countries.
Please check with the tax laws in your country of residence and be sure you fulfil your tax obligations and report your income to the relevant tax authorities.
Now that we have the disclaimer out of the way, what we can say is, if you live in a country that does not have Controlled Foreign Corporation (CFC) laws is not a signatory of the Common Reporting Standard (CRS) then you would be able to form a foreign company whereby your crypto assets could be held offshore and remain tax-free. Your tax liability would only be when you brought those assets from your offshore company back into the country where you reside.
The following structure outline works best for most cryptocurrency operations and looks something like this:
There are several variations to this model which is varied depending upon the structure desired, the location, and the passport of the individual. Some other structures that can be used are a
Cryptocurrency will continue to be a disruptor for many industries and will likely result in a rapidly changing environment that will affect the crypto industry, banks and crypto traders. Is such changing circumstances it's advised to secure your wealth and assets against the unpredictability of the future. We at Offshore Protection help protect what's yours.
Why You Need A Plan B
Threats to Your Assets
Global Diversification Planning