Americans seek tax break on bitcoin profits

Russian expat Katie Ananina has spent the past three years helping people dodge taxes on their bitcoin earnings. It is part of his mission to stick to the man one tax evasion case at a time.

As the name suggests, Plan B Passport offers crypto-rich clients a path to a second passport among their seven, mostly tropical tax havens, all of which are exempt from capital gains tax on capital gains. crypto holdings.

“I was smart enough to understand that $ 200 in bitcoin will be worth $ 100,000 at some point,” Ananina said. “I don’t think the government should have 40% of that.”

Origin story

Ananina isn’t your stereotypical bitcoin maximalist, a phrase used to describe people who believe bitcoin, and not necessarily other cryptocurrencies, is the future of finance.

Born and raised in Chelyabinsk, a city in central Russia, 90 miles north of the Kazakh border, the former professional sailboat racer moved to the United States in 2016 after earning a green card, thanks to her status. from one of the best browsers in the world.

Five and a half years ago she didn’t speak English, but you would never know to meet her.

For Ananina, the allure of bitcoin was laid bare when she saw the Russian currency drop 50% in the two months she lived in Spain as she competed for the Russian national sailing team at the start. from 2015.

“My macroeconomics professor couldn’t explain it to me. There was no way I could run my equations and figure out what happened there,” she said. “I realized that I was not happy with the way the money works.”

So began Ananina’s days as a bitcoin evangelist.

But being a maxi bitcoin isn’t just about believing in one currency, according to Ananina. She wholeheartedly believes in adjudicative arbitration, which for her means letting go of a government’s rules about its actions and finances, and going to where it is best for her right now.

“If the government starts to affect me, I will take everything [my assets] in my hands and go elsewhere, ”she said.

It’s the mindset that led the 26-year-old entrepreneur to start her own business designed to help others do just that. Ananina says several bitcoiners she knows who have held the cryptocurrency for more than a boom-bust cycle are considering getting a second passport to avoid paying capital gains taxes on theirs. assets.

How it works

Each year, Plan B Passport helps hundreds of people from countries like the United States, United Kingdom, Australia and Canada obtain a second passport in one of the following seven countries: Saint Kitts and Nevis, Antigua and Barbuda, Dominica, Vanuatu, Grenada, Saint Lucia, and Portuguese. The company works in tandem with each government’s residency or citizenship-by-investment programs.

“It is an attractive way to attract foreign investment and particularly important in countries with few natural resources,” said Ernest Marais, lawyer at the international tax law firm Andersen.

Marais, who has extensive experience advising clients on cross-border tax structuring, told CNBC that this type of passport buying program is commonly found in tax havens – or what are sometimes referred to as tax havens. “international financial centers”.

“In St. Lucia, you can get citizenship with an investment of between $ 100,000 (donation), $ 250,000 (government bonds) or $ 300,000 (real estate),” Marais continued via email.

Ananina says the average check for her clients ranges from $ 130,000 to $ 180,000.

“This is basically a donation to the country’s sustainable growth fund,” she said. “So the clients donate $ 100,000 or $ 150,000 plus due diligence fees, government fees and then $ 20,000 for my legal fees.”

Typically, families opt for St. Kitts, while St. Lucia is the most popular program for single applicants as it is one of the cheapest destinations and the processing times are quite quick. .

Business has never been better, according to Ananina.

“My only marketing channel is Twitter,” she said. “I literally don’t spend a single penny, but I booked three weeks in advance for consultation calls.”

Renounce U.S. citizenship

In the United States, the IRS treats virtual currency, which includes bitcoin, as well as other cryptocurrencies, as property. This means that bitcoin is taxed the same way as stocks or real estate.

“At a basic level, the taxpayer’s base in bitcoin is what the taxpayer bought it for, and when the taxpayer sells or trades that bitcoin, it’s a taxable transaction,” explained Jon Feldhammer, partner of the Baker Botts law firm and a former senior IRS litigator.

“The taxpayer’s income or loss is determined by taking the sale price and subtracting the taxpayer’s base,” he said.

So suppose the taxpayer buys bitcoin for $ 10,000 and resells it for $ 50,000. This person would face $ 40,000 in taxable capital gains. A second passport does not automatically solve their tax problems.

“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 all crypto earnings they hold, regardless of where the crypto is or the taxpayer is located.” , explained Feldhammer. “It also doesn’t matter if they have dual citizenship; if they are US citizens, they owe US ​​tax on their worldwide income.”

This is why Ananina says that many of her American clients are considering giving up their American citizenship or are considering that option for later in life.

A Plan B Passport customer, who spoke to CNBC on condition of anonymity, said he has spent the past decade traveling through Southeast and Central Asia, and is seriously considering d ‘give up his US passport once he is officially a citizen of St. Kitts. He said the cost of $ 180,000 was worth it, as he is only 1% of his net worth, and capital gains taxes on his crypto holdings would run into the millions.

This person opted for the “first” Caribbean passport, as he describes it, because it is the oldest and most reputable of the programs and offers the most visa-free travel.

But he cautions those who wish to apply to prepare for a multi-month process with a lot of paperwork, including police checks and medical checks.

Emigrants should also note that the United States charges citizens a fee to become free.

“When an American taxpayer emigrates, he is generally subject to the ‘exit tax’, which is essentially a tax equal to that which the taxpayer would be subject if he sold all his goods the day before his renunciation of his citizenship, “according to Feldhammer.

Technically legal

Unlike tax evasion, that is, when an individual deliberately hides their income, tax evasion is perfectly legal, even if a large part of the population considers it unfair.

But Marais points out that the IRS and tax authorities are stepping up efforts to trace digital currency holdings through some of the centralized crypto exchanges. “The reach of the IRS is global, especially with the Foreign Account Tax Compliance Act,” he said.

Feldhammer was with the IRS advice when it made significant inroads in the taxation of U.S. taxpayers who intentionally withheld assets abroad in order to avoid U.S. taxes.

“Thanks to a combination of informants, changes in laws and significant international pressure, it is now extremely difficult for an American to hide assets abroad,” Feldhammer said. “The United States can do the same for crypto and is already considering changing its laws to do just that.”

The US Treasury Department has offered full crypto reports, which would make it as difficult to spend crypto as it is cash, without it being reported.

The IRS is also stepping up efforts at home to track down non-compliant U.S. taxpayers using John Doe Summons, a tool that allows the government to gain information about a large group of unidentified taxpayers. In this case, the summons were sent to different crypto exchanges in order to find people who made at least $ 20,000 in cryptocurrency transactions from 2016 to 2020.

Issuing these summons one exchange at a time is a clunky way to capture non-compliant U.S. taxpayers, but it can be effective, according to Feldhammer.

That’s why many exchanges avoid Americans altogether. Marais told CNBC that Valr, the second largest crypto exchange in South Africa, does not affect U.S. citizens.

Although Ananina does not break the law, she suffers the wrath of law enforcement.

“Every time I cross the border, I am detained at the airport for three hours,” says Ananina. “They ask me a bunch of questions, and every piece of luggage goes through the craziest screening. They literally flip my socks.”

But she says Border Patrol agents can’t take her down.

“If I cross the border on foot it’s a lot easier, so I literally started flying to Tijuana and crossing the border on foot to San Diego,” she said. “It’s a much faster route.”

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