Dennis Wohlfarth of Accointing and Clinton Donnelly of Donnelly Tax Law join Stephan Livera to talk about Bitcoin tax recordkeeping, and strategies to minimize tax. In the full podcast, we chat about:
- Current Bitcoin tax treatment
- Capital gains Bitcoin tax treatment
- Bitcoin tax recordkeeping
- Bitcoin tax strategies locally
- Bitcoin tax strategies for those willing to go overseas
- International crypto tax competition
In part one, we talked about Bitcoin tax treatment and Austrian economics on Stephan Livera Podcast, episode 183, and our guests were from the company Accointing and Donnelly Tax Law.
In part two, we talked about Bitcoin tax recordkeeping.
In part three, we talked about how various crypto tax situations should be treated locally and internationally from a crypto tax law perspective.
Today, our podcast show notes are about international crypto tax competition and determining if moving is worthwhile.
International Crypto Tax Competition
What are the ways that people could explore if moving is worthwhile?
Clinton Donnelly: Let’s take the situation with someone who’s not an American.
I’d propose that the best place for your money is to invest in the United States.
It is the largest tax Haven in the world because the financial industry is an essential part of the US economy, and they’ve created powerful incentives to attract foreign money.
Notably, there are zero capital gains on your crypto assets in the US if you’re a foreigner.
If you go to Bank of America, Citibank, or Wells Fargo, or any of these major banks as a foreigner, you can easily open up a bank account. But you’ll have to go there physically and open one up.
It’s not going to be a question as to why somebody from Australia or Switzerland is coming to the US to open up a bank account because the US wants to be the world’s marketplace.
Opening a bank is not going to be a problem, and you’ll want to do it with these major banks because they’re accustomed to international wire transfers.
Suppose you have an account at a US bank. In that case, nobody will question it from an anti-money laundering perspective if you are trying to transfer money back to Australia. As you know, it’s widely respected as opposed to a BVI (British Virgin Islands) bank or credit card.
The US does information sharing between countries regarding how much money citizens have in foreign bank accounts.
The US has FATCA Law.
All the world’s banks have to tell the US (the IRS) twice a year about American bank accounts in foreign countries. In response to that, the OACD countries created common reporting standards, CRS.
I think about a hundred countries have signed up to where once a year, they will report back the total amount of each citizen’s bank account to their home country.
And the US didn’t sign that. The US did not sign the common reporting standards.
What that means if you have a bank account in the US, the US doesn’t tell any other country about it. So, it’s kind of ironic.
I guess maybe that’s like being the bully.
The U.S. demands that everybody gives information to them, but they won’t share it with anyone else. This is because the US is the most prominent financial player out there.
So they can have this, and whereas it is considered a bit of a tax haven or a low tax jurisdiction, but for everybody who’s not a United States citizen. Thus making it a great place to put your money because it’s a rich investment area.
You can move your money out of cryptos when you want to put it into some of the world’s safest banks and invest in some of the best real estate in the country and Wall Street.
There’s a lot of affluent financial areas with powerful incentives.
You’ve just got to use a US credit card, like a Bank of America credit card that you can use buying things all over the world for the rest of your life, and your local jurisdiction would have no visibility to it unless you disclosed it to them. So that’s a very attractive thing to do without having to change residents.
Stephan Livera: That could be one idea if you don’t even want to become a US citizen. All of that by just opening an account in the US.
Then there are the other options for moving or getting residents in BVI (British Virgin Islands) or multiple places. I presume that’s also an option that some of your clients might explore. For some of them it might be worthwhile to consider that.
Clinton Donnelly: I do a lot of consulting in this area. For virtually every country, the principle of taxation is that you’re subject to taxation if you’re in the country for more than six months.
Typically, you’re subject to taxation on your worldwide income in that jurisdiction where you’ve lived for six months.
Now, the US has a different tax law. They tax their citizens on their worldwide income, regardless of where they live in the world. So it’s a little different wrinkle for Americans, but a common underlying theme in international taxation is that it is based on residency.
Residency is typically defined six-months or approximately 183 or 185 days. It varies how you define it, but roughly the six-month thing.
This creates a massive international tax loophole, which I would call a three-country shuffle, where if you’re never more than six months in one country in a given period, you can keep moving around. It’s kind of like the digital nomad strategy.
You keep moving around, and you’re not going to have to report taxes to anyone. So, again that’s not for a US citizen. It is assuming you’re not a US citizen.
Now US citizens have a different problem. US citizens are taxed under income worldwide. However, two massive tax breaks are given to US citizens:
One is, for every dollar they pay in taxes to a foreign country. They get about a dollar to dollar credit back on their tax bill, which is nice.
The US taxes are lower than most other developed countries. I have clients living in Germany, and their German tax bill is higher than their US tax bill. We still do a US return. They take the German credit, and then they don’t owe anything back to the US.
That’s if you’re an American citizen living in a low jurisdiction where you are still going to have to report back to the US, and you’ll probably end up paying taxes back to the US.
Now for American citizens, there is a fantastic loophole called Puerto Rico. Puerto Rico is a little country South of Florida next to Cuba, and this area is a possession of the United States. It’s not a state, although there’s always talk about statehood. It’s a possession now in the US tax law.
Puerto Rico is treated as a possession, kind of like as though you’re living in a foreign country of all of US possessions, and they’ve negotiated the right to tax their citizens.
If you’re a Puerto Rican citizen, all your income comes from being in Puerto Rico. You do not file a US tax return. Puerto Rico pays its share to the US government on your behalf. So this creates an interesting loophole. Puerto Rico is a Caribbean country, not a lot of indigenous resources. Earthquakes, tsunamis, hurricanes have crushed them.
I mean, the country is bankrupt. However, they created an incentive called act 60 formerly, act 22, where it’s a 0% tax on your capital gains.
So if you’re an American whale and want to do this, you can move to Puerto Rico, which does mean actually moving there.
It’s not like, visit for a day and then go back to California. No, you are moving to Puerto Rico for at least six months of the year, in which case, 0% tax on your capital gains on the Bitcoin that you sell when you’re in Puerto Rico. This is a fantastic thing.
Now, there are some costs. You have to make a $10,000 donation to Puerto Rican charities. There’s a $5,000 annual fee you pay. And you’ve got to buy a house or apartment in Puerto Rico, and you can’t rent it out. There are some serious out-of-pocket costs, but it’s probably worth it for that extra 15% savings. If you were a whale Bitcoin holder in the US, that’d be the movement for you.
Stephan Livera: Fantastic. So that’s a very nice breakdown there.
So if you’re a non-US person, it might make sense for you to do this whole three different countries, different residencies, etc. But if you’re in the US potentially, one idea is moving to Puerto Rico.
One other idea I was interested in discussing related to what we were just saying is what it takes to break your nexus with your home country.
So, as I understand, it’s like you have to break that six months or 180 days aspect.
Are there any other things there that people have to think about when breaking that connection so that they can access the lower tax rate?
Clinton Donnelly: Usually, getting a divorce helps.
I’m just being silly.
Usually, it is the “Let me go back to visit mother” and that sort of thing, you know. There is a bit of travel to it. If you take that strategy, you’re at least saying I’m going to be outside.
Depending on which country you’re from, staying outside that home country for, you know, 9 to 11 months of the year, at least to break the connection.
A couple of things to think about are think of the cost of living.
You can think about creating awareness of other cultures for your family and speaking other languages.
There are several websites where you plug in two cities, and they’ll tell you the comparative cost of living.
And I will tell you, it’s the cost of living that changes a lot between different countries. I just think it’s a great thing to do is once you start traveling, you get the bug.
What I find is I’ve worked with digital nomads as they travel a bit, and then they decided to have a home base, and they stay there, you know, five months a year, and then they move around or that sort of thing.
If you are not a US citizen, if you're willing to do a three-country shuffle, put your investments in US crypto exchanges, have crypto or at least in wallets, and then use US banks. You can move towards a pretty close to zero tax situation and see the world simultaneously.
Stephan Livera: That’s very impressive.
Exploring The Dynamic Between Different Countries Of The World And International Crypto Tax
Stephan Livera: I think another area that you were touching on as well, Clinton was just around the dynamic between the different countries of the world.
So as you said, it’s almost like there are specific pressures where some countries try to push reporting taxation levels onto others.
But then there’s also this dynamic where you said that it’s almost like the richer countries allow individual nations to keep lower taxes and have relatively fewer rules around that.
Could you explain that dynamic a little for us?
Do richer countries allow individual nations to keep lower taxes?
Clinton Donnelly: There was a real concern right before globalization in the eighties.
Starting in the eighties, we had issues with international drug trafficking. We had, people like Ferdinand Marcos in the Philippines, who pretty much alluded his own country and took the proceeds and took them to Swiss and Lichtenstein banks and trusts.
The creation of anti-money laundering laws through FATF
The international community got together and said, we have to stop this. So they created anti-money laundering laws coordinated through the financial action task force (FATF).
The International Monetary Fund (IMF) and the (OECD) are the Organization of Economic Co-operation and Development of about 34 countries that did not like tax havens.
For example, tax havens, like Seychelles and the British Virgin Islands (BVI), believed these little countries were siphoning off a lot of money and bringing no value to their area. So they clamped down on those using the same anti-money laundering laws, and what that ended up doing was it forced people back to the OECD countries that made it a club of the halves.
The OECD countries treat themselves as plus countries. So, that crushed the small island tax haven network.
But at the same time, in Europe, we have rich countries like Germany and France, and we also have tiny countries, Luxembourg, Netherlands, who have tiny revenue streams. They need to allow them to have more latitude to have incentives or lower tax options to bring business there.
The EU is excellent about that, but other countries of the world have to fend for themselves.
This is a massive issue, by which countries compete with each other. There’s massive competition.
The US used to have some of the highest corporate tax rates.
It was at 35%; I think France was higher. But then, the UK and Ireland slashed their corporate tax rates significantly. The UK slashed down to 20% on a phase method. Ireland brought it down for foreign countries working in Ireland down to 12.5% corporate tax. This is a big incentive and part of why Google, Facebook, and Apple all move their call centers to Ireland.
So what the US did to change its international competitiveness is they slashed their corporate tax rates down to 21% and made it exceptionally aggressive. So it is designed to bring big companies who might have been in other countries back home to the US. There is a real war going on for multinational corporations’ tax revenues by countries that are lowering their tax rates to bring them in.
So this will only get more competitive, as people in countries start to do that, they’re going to have to fund it by putting more of the tax burden back on the individual.
In the US, I looked at a pie chart, and individuals pay roughly 80% of all the US taxes to the IRS. The rest of it is corporate taxes.
The argument would be, if they put a tax on companies that make sure you buy a shirt in Australia, then your shirt will be more expensive because you’re paying the company’s tax, right?
Company taxes are indirectly taxed back on the individual. As individuals, we can vote with our feet and move just as I talked about with the three-country shuffle and keep our assets in the US.
We see the same struggle in the US.
We have some high tax states like California, New York, and because of remote offices and this sort of thing, people are starting to flee from big states like New York and California.
They’re not willing to pay high property taxes, high sales taxes, high-income taxes anymore.
We're in a period of transition where we as individuals have a lot of power to change our life's tax dimension and make sure we're getting as much value as we can out of the money we have to pay.
Stephan Livera: That was an incredible breakdown. Great information there, Clinton. One of the exciting things there is that dynamic that you were teasing out: there’s this kind of competition between different countries, and for some smaller ones, like say the BVI or Vanuatu, part of the way they compete is they have low tax, etc.
And for some of them, the offshore investment or the citizenship by investment programs that they offer a part of a good part of their taxation is part of their revenue, that’s part of how they kind of make money.
Clinton Donnelly: An interesting country in South America is a country called Panama. It’s still country, but everybody knows that if anything gets unstable, the US will invade it in a heartbeat because of the Panama Canal.
Now, what happened is Panama has a tax regime where if a company or an individual drives their income from outside of Panama, then it’s not taxed in Panama. Okay. So it’s a true territorial system.
What’s happened is that multinationals who want to do business all over Latin America set up their headquarters in Panama. They take all their money in Latin America back to Panama, Panama doesn’t tax it because it’s a drive from outside of Panama.
This is just a unique arrangement that has enabled Panama to attract incredible amounts of business because almost all the Latin American countries are unstable Argentina, Brazil, Colombia, and Venezuela.
I mean, it’s a volatile mess there, but Panama has the most reliable banking system in all of Latin America. The problem is it was a bit of a shady tax haven and was blacklisted once. It’s got many issues, but it’s moving to progress and improve things, so I would keep an eye on it.
If you were an individual living in Panama, you’re not American citizens.
So any other country, they’re not going to tax your income.
If you’re a remote worker, because you’re getting your income from outside of Panama. It’s a lovely tropical country where they speak Spanish and a bit of English, and it’s got a great airport.
Stephan Livera: Right. And, so I guess the other thing there is, the question of getting residency, citizenship and so on. You might not necessarily need citizenship, but you might need the right to live and work there.
Clinton Donnelly: It is easy. Go to Panama. You put down money, and you open up a bank account.
You put $20,000 in the bank account and, you get a lawyer about $3,000.
They can get you, what’s called a friendly nations visa, and this would be 45 countries that Panama likes. Australia is one of them, you know, all of Europe, pretty much, you get a friendly nation visa. You are now a permanent resident of Panama.
You need to visit for two weeks every two years. But otherwise, you can set up bank accounts, and you have residency there, and you can travel all the world, still say your Panama citizen, keep your business operating out of Panama. You know, so you’re not going to be taxed cause it comes from outside of Panama.
Stephan Livera: Yeah. It’s interesting because I’m thinking back through Bitcoin people or people who’ve famously attacked Bitcoin people like Peter Schiff, he’s in Puerto Rico, as I understand.
I think even Eric Vorhees has talked about it and went to. I think, but I’m not sure. Correct me if I’m wrong, but I think he might’ve gone to Panama. But the other point I wanted to raise is everyone’s got their different view on the justice of taxation and AML laws.
You might be against them, but I think one factor that is potentially playing in favor of the individual. A typical book a lot of people read is called The Sovereign Individual.
And part of that is this idea of going to better countries or going to better jurisdictions for better tax laws or other laws.
I think most people grow up and have this inertia– I grew up here, so I’m going to live here, and I’m going to die here. But perhaps we’re moving more into a world where people can work remotely.
They can then start accessing some of these overseas tax planning and overseas tax structuring to improve the level of competition between the different countries. And ideally, keep it a bit lower for the individual. What do you guys think?
Dennis Wohlfarth: Yeah. I think that’s one big part. Clinton also said you have to think about where you want to spend like the next years, right?
I moved to Zug, Switzerland, to the Crypto Valley or at least what they call it because we started our company there.
It’s a tax Haven for people from Europe because you can easily move there. It’s just; you have to think about all the consequences, right?
For example, you’re not allowed to keep a key to your parents’ home when they live in Germany, because you’re just not allowed to have a residence in another country.
If so, the other country would tax you on your group to income, and there are also the 185 days you have to be there in this other country.
So you need to be aware of the cultural differences. You need to be aware if you speak a different language. You need to think about the costs of living, especially in Switzerland.
And Switzerland, for example, is entirely different from area to area. So it’s not just, I moved to the border of Switzerland. If you come from France or Italy or Germany, you have different areas, and they are small, like Zug, and have excellent taxation law on crypto because you don’t pay any crypto taxes.
You just pay a wealth tax at the end of the year. It would be easy for a European citizen to move there. You just have to keep in mind that you kind of give up your home or where you grew up.
You can move back in the future pretty quickly. It depends on your situation. If you have a family, it’s maybe even harder to move there.
“As Clinton said before, the future of all these taxation laws, especially for crypto, will be another five or ten years until they figure out the correct regulations there.”
My team and I are encouraging everyone to accept these regulations because it also brings grip to the next stage, right?
It’s not just a bad thing. If new regulations are coming in, you have better guidelines.
You would know exactly how to behave. And with those guidelines, you can find loopholes to go around these taxes.
If you don’t have any guidelines, it’s tough to decide what to do, because it’s just not defined yet. Right? That’s a big part to consider for the future.
Stephan Livera: Yeah. Clinton, anything to add?
Clinton Donnelly: I talked to a client, from Serbia, and said he had lived through the time when it was broken up, it became very lawless, and there was no real central government.
And, the criminal element kind of dominated law and order. So there was a real breakdown.
And when I was talking to him, he said, “I want to pay taxes! I’ve lived in a country where we didn’t pay taxes, and it was chaos. I want to pay taxes, and I want a stable government.”
And I thought, wow. It was refreshing because so many people think that even paying a dime to a government or some crime is a value that governments give to you.
And as you were saying Stephan, we should become shoppers to a certain extent. We can make choices about the tax impacts on our lives. The governments generally like you to stay put in one spot and never move, like everybody who has a hand on you can tax you there. They don’t like you moving around because it’s tougher for them, basically changing your residency.
Tax burdens are outrageous, worldwide and it has to do with the number of services we expect governments to give us.
We want the governments to give us social insurance, that if we get old, they’re taking care of us.
We want the roads to have no potholes.
We think that the government ought to do stuff to make things better and regulate and define what it means to be organic, all these sorts of things. Let’s have the government do it.
Every time you say the government ought to, you have to rephrase it and say, I want to pay more taxes so that the government ought to do this.
Governments never shrink themselves, so the only way you can sometimes vote is with your feet and move somewhere else, and the grass isn’t always greener on the other side.
Suppose you have substantial family ties that you love going visit, you know, the big family on Sunday, and having a pasta dinner. In that case, you know, you’re going to miss that if you take off and go live somewhere else.
But you might replace it with something more exciting and adventurous in your life. So you have to look at the whole picture. It’s not just the tax issue.
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