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Crypto wealth and taxation have been the subject of much controversy and litigation over the years. Now a bitcoin enthusiast says she has found a way to help you avoid taxes.
The entrepreneur, Katie Ananina, a Russian, wants to help people with a lot of Bitcoin wealth keep it, avoiding taxes by playing “jurisdictional arbitrage.” Her company, Plan B Passport, works with Bitcoin owners to get legal residency in a tax-haven destination, CoinDesk reported.
Ananina told CNBC that she had an epiphany when she was living in Spain for two months in 2015. The Russian ruble was suffering wild fluctuations in value. Experts say the volatility was due largely to the extreme dependence of the Russian economy on the export value of crude oil and natural gas.
Plan B Passport was conceived because Ananina’s macroeconomics professor couldn’t explain to her why her home currency could lose so much value so quickly. She soon became a convert to the notion that governments should not control money. Algorithms should.
For Ananina, bitcoin maximalism brings with it a belief that people are entitled to keep as much of their bitcoin holdings as they can by playing the governments of the world against one another.
Accordingly, Plan B Passport assists hundreds of people from the United States, the United Kingdom, Canada, Australia and elsewhere to get a second passport in one of seven countries, working with the residence or citizenship-by-investment programs of those countries.
The destination countries (Saint Kitts and Nevis, Antigua and Barbuda, Dominica, Vanuatu, Grenada, Saint Lucia, and Portugal, receives a stream of foreign investment, and, of course, their investors hope to avoid paying taxes on those bitcoin related capital gains. Unfortunately, the tax break, for many of them, may prove a mirage.
Seven years ago the Internal Revenue Service issued Notice 2014-21, 2014-16 I.R.B. 938 PDF, explaining that virtual currency — a broad group that includes all the crypto space — amounts to property for Federal income tax purposes, akin to a patent or a piece of land.
The IRS also at that time provided examples of the application of this treatment. When the owner sells any crypto, i.e. virtual currency, and receives “real currency” in exchange she must recognize any capital gain or loss for the year of that sale.
Form 1040 in its recent iterations asks whether the taxpayer at any time during the tax year in question has “received, sold … or otherwise acquired any financial interest in any virtual currency.” If her only such transaction in a given year were the purchase of a virtual currency with real money, it is not necessary to answer “yes” to that question.
In the other countries where Plan B Passport finds its customers the tax treatment of crypto is similar, although there are distinctions. In Canada, for example, crypto income can be treated either as ordinary income or as capital gains, depending on whether the taxpayer involved is acting personally or trading as a business. If the trading is part of a personal/hobbyist activity, it is a capital gain.
The Difference a New Passport Makes
The second passport does not, by itself, solve the tax problem. Suppose a taxpayer, an American citizen, buys Bitcoins in the United States, then gets a passport as a resident of Dominica, moves to Dominica, and sells the crypto to a person or institution there. Doesn’t that person still owe the U.S. tax authorities on the capital gain?
Yes. In the words of a tax-law expert and experienced litigator consulted by CNBC, “If a taxpayer has a green card, is a U.S. citizen, or is a U.S. resident alien, the taxpayer owes U.S. tax on any crypto gains they have no matter where the crypto or the taxpayer is located. It also doesn’t matter if they are dual citizens; if they are U.S. citizens, they owe U.S. taxes on their worldwide income.”
For some of the taxpayers who avail themselves of the services of Plan B Passport, then, the break may be a mirage. For others, the endgame may be the eventual renunciation of U.S. citizenship altogether.