Legal and Tax Advice for Cryptocurrency Investing

As individuals, investing in the blockchain World, and specifically in a crypto wallet, could be as simple or as complex as needed. It is interesting to explore a bit deeper what this means.

An investment though a wallet could have similar consequences as to have an offshore financial traditional account, from a tax perspective.

There are two ways to invest in an offshore traditional account (and in a crypto wallet):

1) Directly, as an individual (through an account under the name of the Individual); or

2) Indirectly through a wealth structure, but with an individual as ultimate beneficiary of the structure.

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When investing directly in an offshore account or wallet, an individual should consider, among others, the following aspects from a legal and tax perspective:

1. Reputation of the country in which the exchange, in the case or crypto-investments, or the investment bank is incorporated. We do not want to lose our wealth if such country has a weak legal or political system.

2. Taxation on earnings by the individual. Income tax or other types of taxes could be triggered in the country in which earnings are obtained, and, of course, paid in the country where the individual is tax resident. A general rule could be that the country of tax residence allows a credit on income tax withheld abroad.

3. Individuals should be aware of the agreements entered into by and between almost all countries in the world, even the so called tax havens, to exchange information on financial accounts and yes, now crypto wallets in some cases, that reveal several information, such as individuals’ personal data (including the tax identification number), profits obtained and balance held during the year, among others.

4. Awareness that there are some countries in which the Estate Tax or Inheritance Tax could apply in case the Individual passes away. There are some cases where taxes could be as high as 40% (for example, in the United States of America).

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And that is why, in some cases, a thorough analysis on the estate and, if necessary, adequate structure is needed.

A wealth structure could be as complex as the Individual needs, but, in short, could be of two types: legal figures (with or without legal personality of its own) and entities with legal personality of its own.

Also, these two types of vehicles could be considered as taxpayer or as transparent (not subject to taxation) in their country of incorporation.

So, an individual could have a direct investment or investments through a wealth structure that owns the accounts or the wallets, but that provides an additional advantage than only holding the assets.

A very simple example of a wealth structure could be one in which the individual incorporates a Trust (where succession rules could be determined by the Individual) with a non-American company which is the owner of the account or the wallet. In such case, the individual could reach an ordered succession in case of death, and protection against a potential American Estate Tax (since the company would not die in any case).

Of course, the above is just an example of many possible cases that, as said, could be as complex or as simple as the individual needs.

Maybe in the next article, I will give a couple of interesting examples of structuring that could reach more specific objectives, such as a tax deferral or the protection by third parties of the famous “twelve words” without a risk of getting scammed in the process.