So crypto is back, bitcoin’s value is up to around double what it was at the start of the year and that’s a good thing, right?
Well yes and no.
It all depends on how well organized you are.
Will you reap the windfalls of a new crypto growth cycle to build more wealth?
Or will you end up hobbled by taxes because you didn’t take action in time?
Because as the value of crypto grows, so does the probability that the government will tax your gains at ever increasing rates and the more resources you will have to spend to escape that trap, locking you into their vicious cycle.
This article is all about what you need to know now to break out of that cycle or, better yet, to avoid getting caught in that cycle in the first place.
The Crypto Spring
In January 2023 bitcoin and other cryptocurrencies looked in trouble.
The so-called “Crypto Winter” was coming; bitcoin was at $16,547, ethereum was at $1,196 and even alternative cryptos like hex were struggling under the 2 cent mark.
Driven in part by the bankruptcy of FTX, crypto prices began to tumble, the media began their inevitable doom-mongering and the crypto haters had a field day.
Oops, they were wrong.
Because now – a mere four months later – Bitcoin and other cryptocurrencies are set to double in value.
Bitcoin now sits at $28,273, ethereum at $1,945 and plucky hex has grown 108% in value.
Which is great, right?
Well not exactly.
Because any veteran investor will tell you – whether it’s crypto or stocks in today’s world that doesn’t matter – once you make a huge windfall on your investment, guess what, the taxman comes ‘a knockin.
Luckily there are ways you can stop that happening, fully legal and compliant ways we should add, but only if you plan ahead and commit to taking action today.
So what action, exactly, do crypto investors need to take?
How Is Crypto Taxed? (And How To Legally Avoid It.)
The main way crypto is taxed is by capital gains tax.
You pick the right crypto, your portfolio grows, you make profits and then along comes the taxman to literally tax you for your ingenuity.
That’s why the true pro traders, whether that’s people who trade digital assets like bitcoin or cryptocurrencies generally, those who stocks on equity markets, or those who, as we recommend, include both as part of a broader portfolio, they all take advantage of countries that don’t tax capital gains.
That could be a totally tax-free country like the UAE.
It could be a lump sum country like Italy that only taxes you a flat amount no matter how much you make.
It could be done by living in a territorial tax country* that only taxes you on money earned in the country.
Or you could choose a non-dom taxation system country, like Cyprus or Malta, which only taxes money that you remit to the country to live on.
The key point is that you need to be living in that country when you have some gains.
* A word of caution. Due to the intrinsic decentralized nature of cryptocurrency trading, the “source” of the income can often come into question. There is always the danger, therefore, that the tax authorities will deem it as local sourced income and tax you accordingly. Knowing and understanding these pitfalls in advance can save you a lot of money in the long term. If in doubt, take advantage of our expertise and arrange a consultation today.
The Crypto Tax Trap – 2 Scenarios
To better understand the importance of offshore tax planning and how it applies to crypto trading, let’s look at two different scenarios.
You saw a great opportunity to “load up the truck” on cheap bitcoin on January 1st, you’ve called a bottom – congratulations, now your assets have doubled.
You can keep that profit, but eventually – and let’s be honest hodling’s not as trendy as it used to be – you’re going to want to do something with it.
It’s money, after all, so at some point you’ll want to spend it, but of course more countries are becoming difficult about this.
When you spend your bitcoin, especially if it’s a large amount, you can run into issues, even in the US.
Sure if you want to buy an ice cream cone with your profits (well done, you earned it) they’ll leave you alone, but if you want to buy a house with that money, you’re going to have serious problems.
Imagine your bitcoin value rises to the point where you have enough to buy a house.
You don’t want the taxman coming along saying, “the money you bought the house with went up 300%, pay up.”
But that’s exactly what will happen because eventually you are going to incur tax as a capital gain, based on your crypto trading profits.
So in the second scenario, we’ll assume you’ve broken even on your crypto investments.
So you can leave your country now and you can, generally speaking, not pay anything.
In countries which apply an exit tax, which many countries have, you may have to pay tax on the unrealized capital gain on the assets.
So, if you’re in Australia, for example, and you’ve just doubled your money on crypto, since you earned that doubling in Australia, you will be liable to pay for that gain before you leave.
But then if you move someplace like Dubai, your next doubling (or any gain in general) won’t be affected the same way.
Breaking even is not a bad thing. But if you think the bull run’s going to continue, well now that the crunch is on, things are going to be different.
It would have been a lot easier to move during the so-called “Crypto Winter”, because you could have taken your time but today that’s a luxury you can’t afford.
In 2021 Nomad Capitalist was inundated by people who were frantic about their need to move overseas, since every day they waited the value of their portfolios was rising and they wanted to save as much of their profits as possible from being siphoned off by the government.
Moving offshore was much easier when bitcoin was down. If you bought at $30,000 and then it dropped to $16,000, you could have moved offshore without issues while you waited for the value to rise and break even.
The other scenario is if, like some of our clients, you bought your bitcoin around ten years ago when the price was dramatically lower, you have the same problem.
In order to leave your country you may have to pay an extra tax and that’s going to be all on the unrealised capital gains you earned, taking money out of your portfolio.
Timing is everything.
But even if you don’t get the timing 100% right, don’t worry.
As a Nomad Capitalist client we can help find you the best legal strategy to defer your tax to buy you some time and mitigate the worst effects of it.
Similarly, if you earnestly believe BTC is going to go to $100,000 eventually, then every day you hesitate will cost you severely.
Yes it’s going to hurt to go now and pay capital gains tax on $14,000 in profit ($30k – $16k). But not as much as paying capital gains on $84,000 ($100k – $16k).
And who’s to say the tax rate does rise in the meantime?
Look at the news, it’s a mess. We have disruption and destabilization everywhere we look, we have failing banks, failing institutions, there’s talk of a possible recession…
And if everything’s going down, while the value of your crypto portfolio is going up, what do you think’s going to happen?
The taxman’s going to come knocking.
Practicing What We Preach
By the way, we’re not just saying this for the sake of it, we’re invested in crypto too.
As part of our treasury management policy, we own bitcoin and crypto. First because we’re investors at heart and secondly, because we believe in understanding our clients.
So everything we sell, we do. We don’t just offer a service, we live it every day.
And by doing this we learn, and the lessons we learn allow us to better understand and serve our customers and gain wide-reaching, practical expertise and experience.
No other firm in our space does this and that’s why entrepreneurs choose us.
So, in case you were wondering, we’re firmly in the scenario 2 camp. We bought the majority of our BTC back in early 2021 and our average price is around the price that it’s at today.
So we’re pretty much back to even.
And if the price rallies further, as we all hope it will, we can enjoy those gains without having to sacrifice any to the taxman.
Escaping The Crypto Capital Gains Tax Trap
For most countries with an exit tax, it’s relatively straightforward – you just take the hit on the capital gains or unrealised capital gains you earned before you leave.
It smarts a little, sure, but once you’re gone you’re gone and you can relocate to somewhere more tax efficient and not have to worry about that anymore.
Of course we can help you find legal ways to mitigate these exit tax costs and, because you don’t need to renounce your citizenship like US citizens do, you’ll most likely be allowed to retain dual citizenship.
So, for example, you could live in Dubai as a Canadian, and not pay anything because you’re out of the Canadian tax system.
Of course you want to make sure you’re doing it properly, since there are lots of moving parts to consider, which is where Nomad Capitalist can help you.
You’ll often hear us use the phrase “go where you’re treated best”, but equally, we’ve helped a lot of people get out of where they’re at – helping them to properly extricate themselves from their home country’s tax system, however complicated the situation.
By properly we mean legally and in as tax-efficient and simplified a manner as possible.
Then we help with the other side of the equation, making the transition as smooth as possible. That means ensuring that you can enjoy crypto-friendly banking, ease of transactions, company formation if required.
We can handle all of the details to ensure that your crypto investment operations can thrive in a jurisdiction that just leaves you be, and in some cases doesn’t even tax you at all.
Or you can wait and deliberate further, while your portfolio value rises and with it, the anxiety that comes from realizing you’re going to have to take a sizable hit when you’re taxed on exit.
How To Protect Your Crypto Profits From The IRS
If you’re a US Person it’s a little more complicated.
The first option is to move to Puerto Rico under the Act 60 program.
This is a viable solution for those who wish to retain their connection to the United States and it’s something which we can advise you on as a Nomad Capitalist client.
The other option is to renounce your US citizenship, which is a move we always stress should be done with a degree of deliberation.
For this you want the best tax strategy on your way out, so you don’t have to spend unnecessarily, but equally importantly, you want to ensure that, at a minimum, you can enjoy the same freedom of travel and security you did in the US, ideally better.
And that’s where a holistic Action Plan from Nomad Capitalist was designed to do – find the best offshore solution to fit your needs.
The US tax system is complicated to say the least and you may even be liable for US taxes without even knowing it. The key word here is US Persons.
So if you’re a green card holder, you need to make a decision whether or not to relinquish it. And if you’re a long-term green holder – i.e. any single part of eight out of the past 15 years – you will be also liable for the exit tax also.
Another consideration for Americans and US Persons is that, if you have less than $2 million, you can expatriate and not pay any exit tax.
Many of the people who speak to us are on the fence about whether to leave the US or not, which is quite understandable.
But by delaying their decision they run the risk that, if their portfolio’s rise in value above that $2m threshold, they’ve left it too late and now they’re liable to pay a large exit tax.
Let’s say you bought early, paying $100k and now your portfolio is valued at $1.5 million. You can take that amount with you and leave the US tax free.
But if you delay things too long, and the value rises above the threshold to hit $2.2 million, you’ll end up with an $800k tax bill.
So when you consider that those kinds of numbers exist, if you’re in crypto, you should be thinking to yourself, “I need a second passport.”
At the very least you should be looking at one of the Caribbean offers, which start at $100,000 for a single person, with deals for families, etc.
Further up the scale you have Malta’s citizenship by investment program, where, for $1 million, you get access to a crypto-friendly EU member state with low taxes which, right now, is easily the most sought citizenship by investment program on the planet.
Plus, nice though Malta is, once you have your Maltese citizenship, you’re free to move and live throughout Europe with a better passport in your pocket than the US passport, but you still get visa-free access back to the US if you do decide to renounce.
And here’s another reason to stop procrastinating; Europe’s golden visa programs are closing fast. We’ve had two closures in the first quarter of 2023 alone and the EU Commission is putting severe pressure on the Maltese government to do likewise.
So if you’re concerned about having your crypto gains heavily taxed and want the very best citizenship by investment program on the market then you need to get in touch with us today so we can get the wheels in motion, or risk losing that chance forever, while still running the risk of ever-increasing taxes on your crypto profits.
Crypto Was Never Meant To Be Taxed
If you were to sell your crypto while living in the United States, then you can pay the exit tax and keep what’s left.
But if you’re paying tax on unrealized capital gains because you want to leave the country to avoid future taxes and future tax increases, you would need to be able to cover that cost.
So maybe you can sell some bitcoin to do so with the hope that you can increase your bitcoin again later.
Thing is, the longer you wait to do that, and the more the value of bitcoin rises, the more bitcoin you have to offload just to pay your exit tax. Plus the greater the likelihood that your government will want to tax you at a higher rate.
So the bottom line answer is simple – get out. Get out now.
After all, why did we all start investing in bitcoin to begin with? Because we didn’t trust the government.
So what’s changed?
Well, except maybe now we trust the government even less and meanwhile the government is actually in a better position to screw you over than before.
They’re getting better at tracking data, finding out who has crypto and this has become a concern.
That’s why we always make sure that every solution we recommend to our clients is fully compliant and above board, because nobody should have to live in fear of their home country’s government, or any other government – what kind of life is that?
That’s not an enviable lifestyle design choice, that’s a living nightmare, running around feeling like a fugitive.
Why do you want to live in fear?
It’s less hassle to be compliant with the law and if you don’t like the law in your own country, so what, you can leave.
If you’re non-American it’s admittedly easier; you make the choice, pay the exit tax then move on with your new life. A new life with less taxes, maybe even zero taxes, plus the freedom to watch your portfolio grow and grow without government interference.
If you’re from the US, or if you’re a US person, that’s a little more complicated, but the principle is pretty much the same. You need to decide where you’re going to go, whether or not you’re going to renounce.
Either way, you need to stick to your guns, suck it up and pay the exit tax – and as long as you get the right advice, you can enjoy a better standard of life with more opportunities and less taxes.
That’s what we’re selling.
That’s what we’ve sold to thousands of entrepreneurs and investors who were in the exact same boat as you.
Not some magical fairy tale, but practical realities; lower taxes, higher profits, increased travel and investment opportunities – it’s all there for the taking.
So just take it.
Don’t sit there stewing about it, going, “if I don’t do something about this soon the government will take it all away from me.”
Enough. Stop thinking about it, do something about it.