Welcome to the Blackjack year - 2021 is not even half over and it’s already been an incredible ride.
On April 14th, Bitcoin reached its all-time high of $64,863.
Almost a month later on May 11th, cryptocurrency market capitalization reached an all-time high that exceeded 2.5 trillion dollars — Not bad for an industry that has only been around for 11 years.
In the first few months of 2021, a lot of wealth was created in the crypto market and in the few months following these all-time highs, the market has fallen almost 50%.
Although high volatility in the cryptocurrency market is expected, these extreme movements have many investors reassessing their crypto strategy.
Specifically, individuals that trade in their personal capacity are being hit the hardest and forced to make some hard decisions.
‘Individual’ investors being pushed out of the market
With rumors of up to 80% tax on crypto, increased regulation and increasing enforcement, it would seem individual traders are being dissuaded from participating in the crypto market.
Furthermore, cryptocurrency investors are coming to the (sometimes hard) realization their cryptocurrency transactions are not private or anonymous.
It wasn’t that long ago individuals could buy, sell and transact in cryptocurrencies in relative anonymity. It wasn’t that long ago that cryptocurrencies could be transacted without triggering capital gains tax.
Those days are long gone.
It would seem in the early days we were all lead into a false sense of security that cryptocurrency would provide privacy and anonymity.
This simply is not the case.
Your Transactions are NOT Private and NOT Anonymous
The public is quickly waking up to the fact that cryptocurrency transactions are neither private nor anonymous.
Once upon a time in the early days, a degree of anonymity would have been possible but now with exchange KYC requirements, blockchain analytic companies and the public nature of the blockchain make it so that your transactions are easily traceable and identifiable.
For those individuals who have HODL’ed or built up a considerable crypto holding, this is forcing them to make some difficult decisions.
With increasing taxation, regulation and enforcement — What are my exit options?
Option 1: Declare Your Holdings
The obvious (and likely most financially painful) approach is to fully declare your holdings as you exchange them for fiat at one of the popular exchanges.
Although simple and straightforward, this approach will likely trigger the highest tax liability and due to the KYC, reporting and regulations, there will be no way to avoid this tax liability.
Option 2: Go Dark & Stay Dark
It’s important to remember that cryptocurrency originated from the cyberpunk movement whose foundational pillars were based on privacy and anonymity.
Many cryptocurrency investors still hold true to these beliefs, but doing so would be at your own peril.
In recent months the term ‘surveillance coin’ has grown in popularity to help to distinguish between two classifications of coins — Private and Not Private.
It is estimated less than 1% of all cryptocurrencies are considered private and of those, only a few are truly private.
While it’s true that a privacy coin like Monero can afford you anonymity and privacy, it doesn’t help you to exit the system or convert your crypto to fiat (at least not yet).
Furthermore, non-disclosure is considered illegal in most countries.
Option 3: Move Abroad
Treating cryptocurrency as a currency and not as a capital asset means there are no capital gains triggered on the sale of Bitcoin.
The bill that has been passed in El Salvador will mandate all businesses to accept bitcoin for goods or services. This means that Bitcoin will effectively be the same as cash and can be used just as cash is.
For investors who are legal tax residents of the country, this offers a rather simple exit strategy, assuming you are interested in living in El Salvador.
El Salvador may not be the only country where this is the case and likely just the first in a string of Central and South American countries which may move toward treating Bitcoin (or other cryptocurrencies) as legal tender.
In Paraguay, local lawmaker Carlos Rejala is pushing to replicate the approach used in El Salvador. Only time will tell (and the success of Bitcoin adoption and use in El Salvador) whether this spreads in Paraguay and to other Central and South American countries.
For investors looking to establish their tax residence in a country that treats Bitcoin as cash, this is could be one of the easiest exit strategies.
Option 4: Domestic & Offshore Legal Entities
Legal entities are distinct legal persons, separate from the Individual and are usually formed through the use of a company (like LLC).
There are generally two types of legal persons used in this case, domestic and offshore.
One example of the domestic use of a legal entity is the use of an IRA. An IRA is typically a domestic company (LLC) used as a tax shelter to protect investments from taxation until retirement. There are many different types of IRA’s on the market and with the increasing popularity, there are also IRA’s for Crypto.
With over 55 different international tax havens to choose from, there is a lot of choice for the cryptocurrency investor.
Both these jurisdictions offer high confidentiality and privacy laws (the owners are not recorded on the company registry) and allow for cryptocurrency investments.
Furthermore, with the use of a specialization expert, it's possible to set up a crypto-friendly bank account in these jurisdictions that allow for the exchange from crypto to fiat and includes debit cards for ease of spending.
For many high-wealth cryptocurrency investors, this the best option.
What’s Next — More Options?
If the past is any indication of the future, it’s highly likely both North America, Europe and the related Commonwealth countries will continue to treat cryptocurrencies as a capital asset and enforce, tax and regulate the use of cryptocurrencies as a whole.
While smaller and in particular South American countries will likely continue to embrace the technology by encouraging widespread use.
We are only halfway through this blackjack year and I am pretty certain there will be a lot more news on this front in the upcoming months.
In the meantime, if you are still trading cryptocurrencies as a natural person (in your personal capacity), it may be wise and prudent to look at alternative legal structures and approaches to better safeguard your crypto, both onshore and offshore.