4 Ways to Pay Zero Tax on Cryptocurrency Gains

There are 4 ways to stop paying tax on your cryptocurrency gains. If you’re tired of the IRS taking half your short term profits and 20% of your long term gains, here are 4 ways to pay zero tax on cryptocurrency gains without getting in trouble with the IRS.

Note that this article is focused on US citizens and US persons (residents and green card holders). The United States IRS has declared that cryptocurrency is an asset or property, but not a currency. Therefore gains on cryptocurrency is treated the same as profits from the sale of a stock, rental real estate, or any other passive investment.

If you want to avoid tax on your cryptocurrency profits, you must plan ahead. Here are 4 ways

to stop paying tax on your cryptocurrency gains and your capital gains.

Buy Cryptocurrency in your IRA

The easiest way to defer or eliminate tax on your cryptocurrency investments is to buy inside of an IRA, 401-k, defined benefit, or other retirement plan. If you buy cryptocurrency inside of a traditional IRA, you will defer tax on the gains until you begin to take distributions. If you buy within a ROTH, you pay zero tax on the capital gains earned in the account.

To buy cryptocurrency inside of a retirement account, you must move that account outside of the United States and into an offshore IRA LLC. Then that IRA LLC can open an offshore bank account and wallet to make the investment.

You’ll be the manager of the IRA LLC and in control of the investments. You’ll be in total control of the account and the sole decision maker. For more, see: Here’s how to take your IRA offshore in 6 steps.

To get your IRA offshore, you first form the LLC in a zero tax country. Then you move your account from your current custodian (such as Fidelity) to one that allows for offshore investments (such as Midland IRA). Finally you open an international bank or brokerage account and transfer the cash from your retirement plan into that account.

From here, you write the checks or send the wires. You make the investments and can choose cryptocurrency. If you want to invest in foreign real estate, physical gold, or crypto, go for it. You can also use your IRA to get residency in countries like Nicaragua or Panama.

Because you are the investment manager of your retirement account, you must follow all the IRS rules. You can’t borrow from the account, can’t personally benefit from the investments, and must treat the IRA as a professional investment advisor would. That is, all decisions should be in the best interest of the account.

If you already have a sizable retirement account, then buying cryptocurrency in your IRA might make sense. If you’re young, and don’t have a large retirement account, and can’t quickly build a defined benefit plan, then consider the options below.

Fyi… total annual contributions to your Traditional and Roth IRAs combined cannot exceed: $5,500 (under age 50) $6,500 (age 50 or older).

Buy Cryptocurrency in your Life Insurance Policy

Another way to pay zero tax on cryptocurrency gains is to buy coins within an international life insurance policy. You can fund an Offshore Private Placement Life Insurance with any amount of money you wish and create the equivalent of a ROTH or Traditional IRA. There are no contribution limits or distribution requirements.

  • Most offshore private placement policies require a minimum investment of $1.5 or $2.5 million.

If you setup a private placement policy, hold it for a few years, and then close it down, you get tax deferral similar to a traditional IRA. That is, you’ll pay tax on the gains when you close out the policy.

If you hold the policy until your death, and pass the cryptocurrency to your heirs, you get tax free similar to a ROTH IRA. Because of the step up in basis, your heirs receive the coins at their price on the date of your passing and pay zero tax on the appreciation while they were held in your life insurance policy.

Buy Cryptocurrency as a Resident of Puerto Rico

If you’re not old enough to have a large retirement account, and don’t want to lock up a couple million dollars in a life insurance policy, then consider moving to the US territory of Puerto Rico.  The Caribbean island of Puerto Rico has a tax deal you can’t refuse!

We US citizens are taxed on our worldwide income. No matter where we live, we must pay US tax on our capital gains, including gains from cryptocurrency. The only exception to this rule is found in the US territory of Puerto Rico.

Puerto Rico sourced income is excluded from US tax under IRC Section 933. Puerto Rico sourced income is any capital gain or business income earned by a resident of the territory that qualifies for Act 20 or Act 22. A resident of the territory is any US citizen who spends at least 183 days a year on the island.

Because the territory is excluded from Federal taxation, Puerto Rico is free to make its own tax laws for residents an offer any type of tax breaks it deems appropriate. And in 2012, with amendments in 2015 and 2017, this is exactly what they did. It’s the amendments in 2017 that really made Puerto Rico the top offshore jurisdiction.

If you set up an online business in Puerto Rico, and qualify under Act 20, your Puerto Rico sourced profits will be taxed at only 4%. Distributions or dividends from this company to a resident of Puerto Rico will be tax free.

If you move to the island, spend 183 days a year there, buy a home within 2 years of moving, and otherwise qualify for Act 22, you’ll pay zero tax on long and short term capital gains. This means that trading profits from cryptocurrency are tax free to qualifying residents of Puerto Rico!

Finally, Puerto Rico is a popular jurisdiction for setting up a large cryptocurrency trading platform or an offshore bank. Act 273 allows you to build an investment management firm and pay only 4% in tax on your corporate profits. Act 273 is basically Act 20 for offshore banks.

For more information on the wide range of tax incentives only available in Puerto Rico, see: A Detailed Analysis of Puerto Rico’s Tax Incentive Programs.

Give up your US Citizenship

The most dramatic way to stop paying the IRS for your cryptocurrency gains is to give up your US citizenship. Once you expatriate, the IRS no longer has any right to your earnings.Consumer Resource Guide

Again, US citizens pay US tax on their capital gains and cryptocurrency gains no matter where they live. If you move to Panama, but keep your US passport, you still pay US tax on your trading profits. The only way to get rid of the IRS forever is to turn in your blue passport.

To give up your US citizenship, you may need to pay an exit tax and must have a second passport in hand before turning in your US travel document. Without a second passport, there’s no way to expatriate from the United States.

You have two choices when it comes to getting a second passport. You can buy one from countries like Malta ($1.2 million), Dominica ($120,000) or St. Lucia ($500,000 investment), or you can earn one over time by becoming a resident of a foreign country.

For example, you can become a resident of Panama with an investment of $20,000. After 5 years of residency, you can apply for citizenship and a second passport. So, you can either buy a passport or earn one through residency.

Conclusion

I hope you’ve found this article on how to pay zero tax on your cryptocurrency gains to be helpful. For more information, and to discuss an offshore or Puerto Rican tax plan, please contact us at info@premieroffshore.com or call (619) 550-2743.  All consultations are free and confidential.

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