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The IRS is Investigating all US Bitcoin Transactions

The IRS is investigating all US bitcoin transactions. If you’ve been conducting business using a U.S. bitcoin account, your transactions are not private. All U.S. based bitcoin accounts are subject to search and  seizure by the IRS and U.S. courts and creditors.  

Per a press release by the Department of Justice, “A federal court in the Northern District of California entered an order authorizing the Internal Revenue Service (IRS) to serve a John Doe summons on Coinbase Inc., seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015.  The IRS is seeking the records of Americans who engaged in business with or through Coinbase, a virtual currency exchanger headquartered in San Francisco, California.”

A John Doe summons allows the government to get information on everyone who used a particular service or has an account at a certain bank. These same John Doe summons were used by the IRS to attack offshore banking in 2002 and have had a major impact on the industry in the years since.

Back in the day, a U.S. court issued a John Doe summons to Mastercard and Visa seeking information on all U.S. citizens with credit and debit cards issued by offshore banks. That investigation ballooned into an attack on the offshore industry, eventually bringing in billions of dollars, putting hundreds of Americans in prison, and forcing all but the most daring Americans to keep their cash at home.

The current summons targets Bitcoin users on the Coinbase platform. Specifically, “This John Doe summons directs Coinbase to produce records identifying U.S. taxpayers who have used its services, along with other documents relating to their virtual currency transactions.”

According to their website, Coinbase serves 5 million users, 10.5 million wallets, and 45,000 merchants. They’ve raised $117 million in capital and have a market cap of around $10 billion. Once this summons of Coinbase pays off, you can bet the IRS will go after other U.S. Bitcoin exchanges  like CoinsBank, Kraken, and virtual currency providers like Circle.

If you want privacy in your virtual currency transactions, plus asset protection from civil creditors, move your account offshore immediately. A Bitcoin account held outside of the United States is not reportable to the IRS on the FBAR. Likewise, FATCA and other reporting requirements do not apply to offshore virtual currency accounts.

Moving your virtual currency offshore gives you privacy. Place that account inside an offshore company, Panama Foundation, or international trust and you have security from future civil creditors.

Note that I’m talking about privacy and asset protection, not tax savings. Gains in your offshore virtual currency account are taxable in the year earned. You don’t need to report the foreign account, and the IRS can’t issue a summons to a foreign exchange as it can a U.S. provider, but you’re required to pay your taxes.

The best structure for your virtual currency, and any other assets you wish to move offshore, will depend on how you use the account and its size. For example, the most basic form of asset protection is an offshore Limited Liability Company. An offshore LLC gives you “entry level” asset protection and your account is in the name of the company rather than your name, providing an added layer of privacy.

Next would be a Panama Foundation. This is a hybrid foreign grantor trust and holding company. It’s suited to those who want estate planning and asset protection without the overhead and complexity of an offshore trust. A Foundation is commonly used to hold $100,000 to $2 million in assets, or accounts of any size when the owner wants to maintain control over the investments rather than handing it off to a foreign trustee.

The most advanced form of asset protection is a foreign trust formed in Belize or the Cook Islands. While a Panama Foundation is an “off the shelf” structure, an international trust is a fully customizable solution that can include a wide range of features. Because of the higher setup and maintenance costs, a trust is most efficient when protecting assets of $2 million or more.

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For some advanced uses of a foreign trust, take a read through:

The same goes for IRAs and other U.S. retirement accounts. You can move your retirement account offshore, into a foreign LLC, and buy Bitcoin. Investing IRAs in Bitcoin has become very popular in the last year.

Your cash will go from your current custodian to one that allows for offshore LLC investments. Then from that custodian into your foreign bank account… and finally into your Bitcoin account. You’ll be the the signor and manager of the offshore LLC and accounts. Thus, all transfers and transactions will be under your control.

The costs to to setup an international IRA LLC are minimal. Clients who move retirement accounts offshore usually have $60,000 or more in cash to transfer. A husband and wife can share one LLC and multiple retirement accounts with the same owner(s) can use the same structure.

I hope you’ve found this article about the IRS Investigating all U.S. Bitcoin transactions to be helpful. If you would like assistance to structure your affairs offshore, please contact our office HERE.

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