Despite the fact that the emergence of cryptocurrency, especially bitcoin commenced quite a certain period of time, until recently crypto-based businesses become relatively booming. Here at this blog, we will walk you through the pros and cons and how to use an offshore company for cryptocurrency – a trend of business nowadays!
1. A brief overview of Cryptocurrency
1.1. What is cryptocurrency?
There have been a lot of buzzes about cryptocurrencies. A large number of entrepreneurs, start-ups and SMEs have been taking interest in the cryptocurrency world, and this booming trend seems to not stop there. So, what is it?
A cryptocurrency is simply understood as a virtual currency to act as a medium of exchange. It is structured by using cryptography to secure financial transactions of the coin ownership, verify the transfer of assets and control the creation of extra units.
Cryptocurrencies are mainly used as a form of payment to exchange online goods and services (digital transactions). In most cases, they are created beyond the reach of the central authority, but mostly maintained by supporters and communities.
As opposed to cryptocurrency, “fiat currency” is a familiar term. Fiat currencies – US dollar, Euro, Pound for example, are used in physical transactions, and would be all issued and managed by the central bank.
1.2. How does it work?
Cryptocurrencies work through a key technology called Blockchain. It is actually a digital ledger or a decentralized network including a large number of distributed computers to manage and record all transactions. It makes cryptocurrencies not depend on a central server/computer like central banking systems.
1.3. How many types of cryptocurrency are there?
You cannot count how many exactly there are. Until now, there are more than 2000 different cryptocurrencies to be traded publicly, reported by CoinMarketCap.com, and it is interesting to know that a new cryptocurrency can be generated at any time.
However, there are some popular cryptocurrencies that you should know:
- Bitcoin (BTC): The most common and typical example of a cryptocurrency
- Ethereum (ETH)
- Ripple (XRP)
- Litecoin (LTC)
- Cardano (ADA)
- NEO (NEO)
- Zcash (ZEC)
1.4. Trading cryptocurrency: Legal or Illegal?
There are many concerns about the cryptocurrency industry. These internet-based currencies are often thought to exist out of reach of national regulations, which means it is not illegal in its nature.
Cryptocurrency used to be much in the attention due to a widespread crackdown in China on initial coin offerings (ICOs) and cryptocurrency exchanges (Bitcoin) in 2017. This action was in force by the government in order to prevent the possibility of tax and regulations evasions in their country.
However, the status of legality in association with cryptocurrencies is actually different from each individual country. Some parts of the world like the US, Canada or some EU countries do allow the use of cryptocurrency, but all digital currency-related transactions, obviously, are all observed under-regulated provisions and guidance by their governments.
Since the popularity of e-commerce industry, demand for online payment is significantly increasing. The potentiality of the cryptocurrency industry is becoming more obvious. Many countries have recently shown their positive stances on the cryptocurrency trend and allowed new regulations of making it legal presence in their territory.
2. Benefits of using offshore company for cryptocurrency
There has been a widespread increase in using offshore vehicles to enhance greater benefits for cryptocurrency transactions, especially the bitcoin. Particularly, offshore company formation in crypto-friendly jurisdictions is one of the most recommended options for cryptocurrency traders.
2.1. Greater privacy & asset protection
Privacy maximization is the top priority that draws crypto-based businesses to go offshore. It appears to be common that if the bitcoin and its owners are more separate, there will be stronger layers of protection for this kind of digital assets. For this reason, keeping bitcoin and other cryptocurrencies in association with an international business company seems to bring the best of both worlds.
Other offshore management vehicles that are also widely preferred include forming a limited liability company or a trust for offshore asset protection.
2.2. Tax advantage
Are you finding a solution for tax savings in crypto? Moving offshore is a good idea.
By having your coins stored by offshore companies, you may relieve the burden on a set of tax obligations as imposed in your home country. However, it depends on which jurisdiction you wish to incorporate your offshore company for cryptocurrency that the savings can be more or less significant proportions.
Many countries like Finland, Belgium or some parts of the EU are more likely to consider cryptocurrencies, including Bitcoin just like a commodity or financial related service, rather than a currency. As a result, they feel free to allow an exemption from VAT/Sales tax for such bitcoin businesses.
Some other countries, on the other hand, like the United States where the Internal Revenue Service (IRS) categorized Bitcoin in the list of assets for tax purposes, have imposed strict regulations on tax requirements for cryptocurrency businesses. In the hope to reach a more friendly option for crypto investment, we may now understand why a lot of US-based bitcoin traders have increasingly kept their eyes on low or free-tax jurisdictions.
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3. Challenges for offshore Crypto-based companies
New doors often go hand in hand with challenges! Crypto-based companies moving offshore do not run beyond difficulties. Here are a few:
3.1. Potential, but not yet practical
The key to mention is that you will still need regular fiat money in your account to use in common situations as not all companies utilize cryptocurrency for transactions in reality. Thus, the demand to transfer your digital currency to paper money or cash is inevitable.
The similar problem can be seen in circumstances where you need to make payments requested by relevant services or pay monthly salaries for the company’s employees but the in-charge agencies only allow certain settlement methods exclusive of cryptocurrencies.
In some places, cryptocurrency is limited to accept only through some specific platforms like Revolut, Mister Tango or Kraken, which lead to difficulties in use.
We recognize the great potentiality of cryptocurrency to many traders, but it is also clear that its practicality and the acceptance for its availability in purchasing goods and services of all walks of life may be a big matter of concern in near future.
3.2. Few banks of choice
The first decentralized presence of cryptocurrency which is Bitcoin has actually emerged for just over 10 years. But currently, there are still many countries with no regulation on legal uses of this form of currency. The absence of such regulations has obviously affected significantly the number of financial institutions which can allow their customers to get involved in crypto-related transactions.
So far, it seems impossible for individuals and companies engaging in crypto-related business to open an offshore bank account, let alone banking in large and reputable banks. Solution for this problem that many traders were heading to is to set up a virtual account or wallet with a financial institution, mostly a fintech-oriented company to receive and withdraw money from their brokerage account. Some can be mentioned here are EMI institutions in Europe, Neat Hong Kong, or Transferwise.
These institutions put in place a really easy procedure so that you rarely receive a rejection. A big drawback of this is that not like traditional banks, a financial institution is less regulated, and most of them were just open recently. So, a wise way to cope with this situation while still benefiting from its openness to risky business is not to put all eggs in one basket.
3.3. High risk of volatility
Bitcoin and other “virtual” assets are often considered as “risky assets”. Due to the fact that digital currencies are typically not kept under surveillance of governments, the price volatility often appears as a major consequence thereafter. Without any protection, traders of cryptocurrency may suffer potential losses.
The price of cryptocurrency may go up and down very suddenly. Key players in crypto trading probably still remember the history case of bitcoin volatility in the year 2017. This first blockchain-based cryptocurrency reached its peak of around $20,000 per bitcoin in December 2017. But just four months later, a dramatic three-fold plummet to no more than $7,000 in the price bitcoin was witnessed.
4. How to use an offshore company for cryptocurrency
Below are some classic cases of using such offshore vehicles for greater asset protection and privacy regarding cryptocurrency that you can take as reference:
– Establishing an IBC or an international limited liability company (LLC), then proceed to activate a proper wallet to keep your cryptocurrency in. This digital wallet can act similar functions as offshore bank accounts which enable relevant transactions of the wallet’s holders to be secure and confidential. Many offshore jurisdictions with stringent privacy laws can even offer maximum protection from civil creditors.
– Moving your cryptocurrency offshore through forming two different international business companies (IBCs). While the first offshore company which is mainly funded with bitcoin aims at a long-term investment, the second one will function as a trading company whose funds invested by the first company.
– The combination of private foundation and international business company. You can form an offshore company (international business company for example) to be held by a private foundation which is primarily operated for charitable purposes. The IBC can then receive bitcoins as its share capital, provided that the offshore foundation allows donations sent in bitcoin as well.
– Setting up an offshore trust. Many high-net-worth investors with their coin fund reaching more than $1 million in value are often in favor of international trusts for the best estate and asset protection.
– For most US citizens in search of avoidance on IRS audits of their crypto account, the viable and most used option can be to take their self-directed IRA offshore and invest in cryptocurrency by forming an offshore LLC owned by their IRA.
The abovementioned structures tend to add more layers between you and your assets, which translate into better privacy and asset protection. Your tax obligation is still hanging and you can only defer it until you repatriate your profit. With that being said, earnings from your cryptocurrency investment can be reinvested 100% tax-free as long as you leave it offshore.
Please do note that these strategies for using offshore companies to deal with cryptocurrency bring different tax implications depending on business structure, the jurisdiction you choose and your tax residency status. So you should better consult your lawyer for legal advice.
With that being said, it can be very quick and easy to start your offshore crypto company. Check out our listed steps on how to open a company in offshore jurisdictions.
5. Further considerations for offshore company formation for cryptocurrency
5.1. Obtaining license: Is it necessary?
As the aforementioned, many jurisdictions are still in the stage of analyzing how cryptocurrency should be treated in their countries, including the matter of licensing and regulating crypto-related activities. There is no confirmed answer for what types of license are required for cryptocurrency businesses in all offshore countries, but it may be varied depending on each offshore jurisdiction as well as the nature of their business.
As a rule of thumb, if you are trading crypto for personal purposes, then a license is not necessary. Otherwise, opening a crypto-related business or trading cryptocurrencies on behalf of others will demand one.
If it is the case you need to obtain licenses for your crypto-storing/trading/exchange activities, some popular types of licenses that you should take into account are Cryptocurrency Exchange License, Broker’s License, Financial Services License, Money Management License or other financial permits if required.
It is advised that you engage a professional corporate service firm to seek useful advice on how to move your cryptocurrency offshore legally!
5.2. CFC rules
Controlled foreign corporations (CFCs) refers to corporate entities owned and controlled by a resident of a particular country, but they are registered and carrying out their business outside of that country. CFC rules demonstrate how taxpayers should declare their foreign earnings. CFC requirements may be varied from country to country, but all of them aim to prevent multinational corporations from tax evasion.
Only some certain countries impose CFC rules. If you are living in the country of residence with CFC rules, please check them before moving offshore.
Need to know more about how CFC rules work? Check out our blog here: An Overview of Controlled Foreign Corporation Rules (CFC rules)
As of today, cryptocurrency is a trend, but it is also a topic for debate. The potentiality of cryptocurrencies is obvious, but it’s sure that there must be more considerations for any traders or investors to engage in crypto-based businesses.
Below are highlights of what we have discussed with regard to How to use an offshore company for cryptocurrency:
- Cryptocurrency is a “virtual” currency based on the blockchain technology to facilitate the online exchange of goods and services.
- There are various types of cryptocurrency, chief of which Bitcoin is the most popular.
- Whether cryptocurrency is legal or illegal is still a matter of debate. But generally, it depends on each jurisdiction and the relevant business activities engaged in cryptocurrency to determine its legal status.
- Using an offshore company for cryptocurrency is a good option thanks to its set of benefits like greater privacy, better asset protection or tax savings. Note, however, that there are still certain challenges for crypto-based companies to bear in mind, including volatility risks, its limited use and so on.
- International Business Company (IBC), Limited Liability Company (LLC) and International Trust are considered to be the most popular vehicles for cryptocurrency traders when moving offshore.
Still need to consult more with our experts on forming an offshore company for cryptocurrency? Feel free to contact us!