Dennis Wohlfarth of Accointing & Clinton Donnelly of Donnelly Tax Law join me to talk about Bitcoin tax treatment, and strategies to employ to minimise tax. We chat about:
- Current tax treatment
- Capital Gains Tax
- Record keeping
- Tax strategies locally
- Tax strategies for those willing to go overseas
- International competition
Links:
- Accointing: www.accointing.com (ref link – 10% discount)
- Donnelly Tax Law: Donnellytaxlaw.com
- Accointing Twitter: @accointing
- Dennis Twitter: @WohlfarthDennis
- Clinton Twitter: @cryptotaxfixer
Sponsors:
Stephan Livera links:
- Show notes and website
- Subscribe on YouTube: @stephanlivera
- Follow me on twitter @stephanlivera
- Subscribe to the podcast
- Patreon @stephanlivera
Podcast Transcript:
Stephan Livera:
Alright, so I’m just going to bring in my guests today, who are Clinton and Dennis welcome guys.
Dennis Wohlfarth & Clinton Donnelly:
Hey, it’s a pleasure having us Stephan.
Stephan Livera:
Yes. So thank you guys for joining me. I think you know, obviously tax is not something people want to talk about, but I think at the same time, it’s one of those things where I have probably a lot of listeners who would be interested to understand how to think about some of these different issues and what are some strategies that they could employ. So look, first off, maybe if you guys want to just start off and tell us a little bit about yourself and also if there’s any, you know, disclaimers and so on that you need to make.
Dennis Wohlfarth:
Yeah. So my name is Dennis. I cofounded Accointing officially in 2018. We had a system running before that because where like a group of investors and where in the markets and since many years, and we basically, at some point face the problem of keeping track of all our investments and especially back in the days of ICOs and all the things that were happening back then. And so we decided to basically build a tracking tool for ourselves, just backend tool. And in 2018, we went public with it to support like the crypto market a little bit in terms of keeping track of everything, creating tax reports for different countries. And we’re now at the point where we support the U.S., Austria, Switzerland, UK, and Germany for specific tax reports and other countries with specific general channel performance. So that’s kind of a quick introduction.
Stephan Livera:
Sure and Clinton?
Clinton Donnelly:
Yes. My name is Clinton Donnelly, and I’m with Donnelly tax law. We do tax preparation and defend people with tax audits of their cryptos. I do tax preparation in the United States, but I have a very international experience. I have a advanced law degree in international financial regulation, including taxation, got it from the university of Liverpool UK. And then also I have clients in 48 different countries mainly Americans in 48 countries who are basically exploring, you know, the tax implications of either doing business in the US or being Americans living outside the US I have a significant practice with cryptocurrencies cryptocurrency return preparation tax, amnesty related to those things.
Clinton Donnelly:
So have four books out of cryptocurrency, and I do a lot of speaking about it.
Stephan Livera:
That’s fantastic. So look, yeah, let’s get started. I think, you know, the naive person first thinking about Bitcoin, depending on how they’ve acquired that Bitcoin, they might think I’m super private and so on. What’s the reality in terms of Bitcoin taxes and what are some of the typical things that people need to be thinking about in the world of Bitcoin taxation?
Clinton Donnelly:
Well, let me make a comment on that. The international community has decided that Bitcoin is considered a virtual asset property. It’s not currency, it’s not a cryptocurrency from an international point of view. So as such taxation occurs when you sell or exchange that Bitcoin. So merely buying Bitcoin is not going to be a taxable event.
Clinton Donnelly:
If you’re HODLing that Bitcoin for a couple of years, there’s no taxes involved. It’s only when I sell it or exchange it that I’m going to incur taxes. So on the game now, you know, if Bitcoin hits the moon this year, you know, what sort of thinking would your listeners want to have in terms of taxes? Because the one thing about taxes, it’s usually a percentage of your income. Now on one hand, I’d say, I’d wish all your listeners to have incredible tax bills. That means they made incredible amounts of money, right? But that being said, how do we minimize what we do have to pay and not give the government or any government more than they need to get, you know, legally. So you know, that, I think that’s really, when you think about taxes, it’s gonna, they’re gonna take depending on what jurisdiction you’re in 25 to 50% of your money that you’ve worked so hard in investing. So you attack strategy is just as important as an investment strategy,
Stephan Livera:
Right? And so I think the important thing there really is, it’s almost like the tax tax agents and the tax law of the land is, is encouraging people to HODL, right? Like that’s, that’s kind of the encouraged position because it’s only when you actually sell or spend that Bitcoin that you actually have to even think about these taxes, right?
Clinton Donnelly:
That’s exactly right. You know, most countries in the world, the governments want to encourage investment. Now investing can happen where you buy it and hold it for a long time or investing can happen when you just, you’re like a day trader you’re in and out, in and out well corporations can not really grow a business. If they’re on day traders, okay. Investing in their company, they want somebody who’s going to invest and they’re going to leave that money there for a year, two years, whatever. And that way the corporation knows that they can bank on that investment. So governments incent that by having maybe one or having extra tax tiers for capital gains is what you call selling property. So they usually there’s like most countries have a long term capital gains incentive. I know in the US it’s your tax rate goes down to 15% in certain countries. It goes down to zero or some very small amount or after so many years at zero. So this is an incentive, and that is a significant reward for the HOLDer to really be aware, have I hit that long term capital gains mark in most countries? That’s the easiest, most legal thing to do is to go for the long term capital gains incentive.
Stephan Livera:
Right. And my understanding as well, and perhaps this obviously varies internationally. But my understanding, at least from the Australian position of it is that it, it matters whether your income is being treated as your business is one of trading or your business is one of you are investing in speculating, and that’s where, so if you’re in the trading world, it’s seen as like, well, you’re trading income, you earn a hundred thousand dollars, that’s your income for the year, but in the, for most people, it’s in the capital gains kind of world of it’s an asset. And when you made a gain, you’re taxed on the gain. That’s is that essentially a fair way to think about it?
Dennis Wohlfarth:
Yeah, it definitely is. So like like Clinton already said it’s a little bit different than all the, in every country. And for example, in Germany, you have, after holding it for one year, you have zero taxable gains or like you, don’t have to pay taxes on it because it’s just becomes long term. Obviously there’s some, you need to be careful there. If you are trading a lot of like margin trading of these kinds of of trading activities, you need to be careful that you don’t get treated as a company, as an investment company where, because it basically changes the rules a little bit and you have to open a business for that, but most investors, and I’m really talking about investors that maybe trade a few times per month. They usually don’t have a problem with that. And so based on that holding period, there’s also a few good parts that you can use there.
Dennis Wohlfarth:
So obviously if you buy Bitcoin or any other crypto assets at a high price, and the price drops, you can use that and harvest basically sell this loss and use it as a loss for the coming years when you maybe have a, when you create some gains. So it really depends on on how, or when you invested in crypto. And so that’s one big part, I guess, that we also offer for our clients of accointing, because we basically allow everyone to import all the transactions, all the trades for free, and we have different tools to monitor and to display the holding periods or assets, because imagine you’reing trading on different exchanges, you hold it in different Bitcoin wallets. You’ll never know what Bitcoin is actually long term. So that means has a lower tax rate and what Bitcoin is in the short term gains.
Dennis Wohlfarth:
So you need to be careful there, and we have a way of displaying that. There’s also a little bit more for the optimization part. You can obviously go really deep into that. So there’s different ways of tracking. You can keep track of your investments in one single day, or that means you buy Bitcoin. And then you use in most countries that use first in first out method to calculate which Bitcoin or cost basis you actually have to use when you sell something. So there’s a single where you put everything in one excel file. You use the oldest one like the oldest Bitcoin cost basis that you have and sell that. But in most cases, that’s not what you want to do, especially if you do more day trading. So a good way of optimizing a little bit more in the micro field here is to keep track of everything where for multiple Depot tracking, that means if you buy something in one exchange, you send it to your wallet.
Dennis Wohlfarth:
This cost basis gets transferred to the wallet. And when you buy something else on another exchange, you day trade there with Bitcoin, you just sell the Bitcoin that are really on this exchange and you don’t touch a long term investments. And so with that strategy, you obviously can drain a few percentages of your portfolio and the rest you can keep separate and go for the long term gains. So it really depends because obviously if in 2017 you would have like an investment of, I don’t know, maybe 10 Bitcoin, and they’re just six months old and you don’t sell them. And afterwards the Bitcoin price crashes, there’s a trade off, would it be better to sell at that high prices or is it better to hold? So it really depends, on what you expect market to do in the future.
Dennis Wohlfarth:
So it’s obviously good to optimize for taxes, but not all the time when you trade. So that’s really the trade off that you have to that you have to use there. Yeah, I mean, for example, there’s like countries like Switzerland where you don’t pay any gains on your crypto trades, it’s just wealth tax at the end of the year. So obviously if you’re lucky and you live in this country and you want to do day trading, it’s a little bit easier. But you can’t really make that happen everywhere in the world.
Stephan Livera:
Yeah. And so the first point you mentioned there was around tax loss harvesting. So I guess just kind of replaying my understanding of that is you purchase at a certain price and now the price has fallen. And now you basically, what people do is they sell and rebuy to kind of lower their cost basis. So that then now in future they’ll have a loss that they will be able to use against their gains in the future. Is that that right?
Dennis Wohlfarth:
Exactly.That’s correct. And if you do that you basically want to use the, like, you always want to sell them before it’s older than a year, because you can actually use more losses to for future gains because the tax rate is higher in Germany. For example, if you sell after the year, because the tax rate for long term holdings is zero, you don’t have any losses that you can subtract from your future gains because it’s just not taxable anymore.
Stephan Livera:
Yeah. Right. Yeah. And yeah. So then the other point, it was just around what you might consider segregation. So for those people who are traders, they might have a holding amount. That’s created like a long term, that’s their long term holding. That’s going to be tested, taxed as an asset at a CGT sort of style. Whereas if they’re trading, that’s like a separate portion of their Bitcoins, let’s say, and then if they are a trader then that is what gets assessed on a different basis because that’s more like standard income, right? Yep.
Dennis Wohlfarth:
Exactly. So you don’t want to mix those two depots up. So obviously you can use different strategies there, you can just, once you, if you buy Bitcoin every month, for example, you can just use different addresses and put these Bitcoin in there from the beginning, if you mix them up. And if you traded over the last years and you now want to actually use that method, you can use, like I said, this plain tool that we offer and we basically tell you in which they tip you have long term holdings and short term holdings, and what’s the trade off between them. So it’s kind like you can basically go deep into that and analyze, and then use the correct Bitcoin, maybe from your wallet, number 10 to sell now, because this would actually create a loss. And on the other hand, the Bitcoin that you help hold on, Coinbase would create a gain, right?
Dennis Wohlfarth:
So in the end you sell one Bitcoin, but you can sell the correct one in order to create a loss with that trade.
Stephan Livera:
Yup. And I’m also curious how people typically deal with it when they’ve got multiple wallets or multiple exchange accounts. What’s the typical way that you and your customers normally deal with that?
Dennis Wohlfarth:
Yeah, so we, just allow our customers to connect their exchanges directly, either with an API or direct connection. If the exchange offer step for Bitcoin and for other blockchains, we have an import of like all the historical data through an xPub yPub, or just normal Bitcoin addresses. You can then combine that all in one portfolio. And we keep track of all the things that like the entire money flow in your system. So that means if you send something from like, from your first exchange to your Bitcoin wallet, we have that connection through the transaction ID and we create so-called internal transactions.
Dennis Wohlfarth:
And these internal transactions are not a taxable event. Like they even create a fee because it’s like the transfer fee that you can use later as a cost that you, that you actually spend for transferring those Bitcoin. And we use that internal transaction to you to transfer the cost basis from this first wallet to your second wallet. And we always keep it with that Bitcoin. And so that’s really nice because you can, with that actually go back and really deep dive into that money flow. And you have everything completely tracked. It’s obviously not all at all. It’s really nice to have not only for tax purposes, but also to prove to your bank where you got the funds from. I mean, a lot of bands, especially if you trade with higher amounts, they want to know where you got done investments from, right.
Dennis Wohlfarth:
Because it could be some money laundering activity, if you can track the entire history that makes that easier. I say.
Stephan Livera:
Yeah. And so that’s one way where you sort of aggregate across all of your wallets, all of your exchanges into one thing. And I guess the other part is you, I guess it, because when you sell that’s a capital gains event typically. And so it’s kind of just, you want to sort of have the record there to say, this wasn’t a sale. This wasn’t me spending, this is me self spending. Right. And so that’s not traded as a capital gain, et cetera, and therefore not taxed on that.
Dennis Wohlfarth:
Exactly. Or you even use it as like you send a gift or you you did some other activity it, right. So you can just prove where, when and in some countries like for example, in Germany, we currently sued the government or we are in court against the government there because we don’t agree with the tax regulations.
Dennis Wohlfarth:
So we kind of say that a payment shouldn’t be a taxable event. And we also say that people that actually report the taxes in Germany, especially, they are not like they are the truthful people and they report, Hey, I made some gains there. I, in theory, I have to pay taxes, but it’s not fair because the government actually, that can prove that other people that don’t report taxes like do tax fraud because they just don’t have a way to go into the blockchain at this point or into the different exchanges, because there’s somewhere, all over the world. Right. So they cannot prove that you trade it, but they want truthful people to pay taxes and that’s not legal in Germany. So that’s why we’re currently suing sewing, determined government there, or like the tax regulation and try to make it clear to them that it’s either they can do that for everyone, which adult that can, or that they’re not allowed to, to file taxes on crypto investments on crypto trading.
Dennis Wohlfarth:
So that’s kind of like one part that we try to do for the German community, at least. And Clinton knows more about the US part. And there’s obviously also like some really exciting things happening in the future. I mean, there’s a few discussions right? Where they, they try to not treat payments as a taxable event, which would be obviously really nice, but I mean considering all the things that are happening in the market with lightning, with all the defy that is coming into the market, I don’t know how they want to do it.
Stephan Livera:
Right. Yeah. So let’s talk a little bit about that. So this idea of payments and the taxation that occurs on them, like theoretically from the capital gains tax point of view. So I guess what you’re getting at here is for example’s sake, let’s say you buy it a hundred dollars worth of Bitcoin, and then later it’s $200 worth of Bitcoin. And then if you now spent a portion of that, then like, I guess the point you’re getting out there is theoretically there is a capital gain on which you know, like government want their pound of flesh on that. And so what, what are some of the different ways that is treated from a taxation law perspective?
Clinton Donnelly:
Well, you’ve got the challenge. I mean, if I sell Bitcoin and buy a car, you know, so I have capital gains when I dispose of that Bitcoin, I bought it at a lower price. I’m selling it at some higher price equivalent to what I’m paying for the car, that’s the capital gains. And so we see countries like Portugal who were saying, well, if you pay for Bitcoin, we’re not going to have a VAT tax involved, which you can start to see, well, Hey, that’s kind of a duplicate tax here VAT on top a capital gains. So, you know, and then in the US they, it’s just the sales tax, the taxes on what is sold, not the means by which you had paid for it. So it’s a little bit different structure, but, you know, really cryptocurrencies are just turning the, tax regimes upside down because we see here with, blockchain technology DeFi and smart contracts, and all these really exciting innovations are just transforming the financial industry and turning upside down our whole notion of currency and property.
Clinton Donnelly:
And especially from a tax and accounting point of view you know, as Dennis was mentioning his own company was how do we do accounting when we’re no longer trading in Fiat currency we’re trading in Bitcoin, you know, it’s an asset that’s constantly changing value relative to the Fiat’s in which we have to report our business results into the tax authority. So it’s everything’s getting very complicated. And what we’re finding the tax authorities are finding is that defining cryptocurrencies merely as an asset merely as property is really not adequate because it’s changing so fast. It’s becoming far more than mere property, nor is it adequate to call it currency because it’s not embraced by one government and all that’s involved in that. So I think what we’re seeing tax authorities are really kind of there, they’re holding back in coming forward with new taxation regimes targeted at cryptocurrencies, because they just don’t know where it’s going, and they don’t want to hamper progress by having tax rules, which are, make no sense as, as the technology progresses. So I think we’re going to see taxation rules that are much like property continue, at least for the next five years, until, there’s a real settling down of this massive evolution in finance. That’s frustrating to some people, but you know, I think there will be something newer or better coming out of it.
Stephan Livera:
Yeah. So I guess for most people who are just holding it’s going to be treated as property and it’ll just be the CGT. So then I suppose for most people they’re just looking at what are ways to legally minimize my taxes on that. And so I guess one of them is tax loss harvesting. One of them might be, you know, if you can move to a better jurisdiction, things like that, are they, are they typical strategies? people are employing or even like that the whole collateralized loan idea as well of like putting out some Bitcoin, getting USD so that you’re not incurring a capital gains event. I suppose these are some of the strategies that people typically employ. Are they, what you see in your experience? Are there any other ones that people are employing?
Clinton Donnelly:
Yes. I mean, there’s lots of those, people are putting in trusts and then getting payments from the trust me, these are sort of all variations. You’re just kind of, there’s a little bit of a shell game here. You’re moving the tax, the different places the tax eventually gets paid. And you’re trying to, the thing with, like you mentioned, with collateralized loans is you know, that’s a great strategy. If you want to use the value of a short term asset until it’s been collateralized long enough that you can characterize it as a long term asset and then sell it at the long term capital gains rates. That’s, you know, that makes sense. These are just small micro strategies. If you really are someone who, if you’re, let’s say you’re a whale, you have massive positions in Bitcoin and you see yourself liquidating a lot of this, then, you know the one strategy, if you really want to, let’s say improve on the long term capital gains rate would be to relocate.
Clinton Donnelly:
So, you know let’s put a framework in place to, how will we make that decision? So if I were to relocate somewhere, you know, I have you know, first of all, I’m selling where I’m at, I’m moving somewhere else. I’m incurring new expenses. What’s the cost of living there. What’s the quality of living? Will I find myself so bored, I’m flying back to you know, I can be living in an Island of the South Pacific but be so bored of flying back to Sydney every month to go to you know, an opera show, you know? So there’s some quality of life things. You also have issues relative to access to banking clearly with liquidating some Bitcoin, you want to be able to put that into a bank and get access to it. Well, what bank can you open up a bank in that foreign jurisdiction people may ask, why are you coming to Bali to open up a bank account?
Clinton Donnelly:
Why are you coming to British Virgin islands to open up a bank account? If you live in Europe, if you live in Australia, these are valid know your client type of due diligence questions that are maybe difficult for you to open up a bank. If you don’t have a bank, then moving, is it going to be a foolish thing to do? So we let’s think about the cost of that. So let’s say all if your upside is that you have a hundred thousand dollars worth of Bitcoin long term capital gains rates, let’s just use the US ones of 15%. That means your tax is $15,000. What can you do? That’s going to reduce $15,000. Well if you move somewhere, you might not pay the spending. It might be zero tax rate there, but you might be costing more than the 15,000 to move right now, if you had a hundred thousand Bitcoin, right?
Clinton Donnelly:
So we’re talking about a lot of money. Now, we’re thinking, you know, I might be slowly liquidating my positions over multiple years. How much am I going to liquidate on a yearly basis? Will I be liquidating a hundred thousand? Well, that means I’d be generating normally a $15,000 tax. Will I do better living somewhere else? Well, possibly, you know, on an ongoing basis, you’re doing that. So, you know, Portugal has an interesting tax regime with zero tax. It’s a nice cultural area to Europe. That’s very good BVI. A lot of people that’s one of the topics look, any of the Caribbean countries, the Seychelles, they all have a very interesting tax regime. The problem with these banks is if you have a, if you’re doing something with a Seychelles bank, BVI bank or any other bank of the world is going to raise a red flag on that.
Clinton Donnelly:
So it was very difficult to work with a gray bank, countries that are in the gray area when it comes to anti money laundering laws the US would be in Puerto Rico are two really exciting options, both for Europeans and non Europeans or Americans. So I’d be happy to dig into those some more if you’d like.
Stephan Livera:
Sure. Yeah, I think let’s, let’s talk a little bit about some of the, you know, good places around the world, as you mentioned, I know Portugal has no capital gains tax. I know Singapore has no capital gains tax. I know Switzerland has none. And then, so Germany as you mentioned Dennis. I think if you hold for more than one year, there’s no capital gains tax. So I think it’s kind of like, depending on where you look around the world, there might be some places that are a little bit better and others not so much.
Stephan Livera:
But what are the ways that people would explore if they were to, like, let’s say they had enough, that it was worthwhile for them to consider moving what are the ways that they would explore that?
Clinton Donnelly:
But let’s take the situation as someone who’s not an American I’d propose to you that the best place for your money to invest is the United States. It is the largest tax Haven in the world. And it is because the financial industry is a very important part of the US economy. And they’ve created very strong incentives to attract foreign money, particularly there’s zero capital gains if you’re a foreigner on your assets. Crypto assets in the US you’re very likely to get, if you go to like Bank of America, CitiBank, Wells Fargo, these major banks, you as a foreigner can easily open up a bank account.
Clinton Donnelly:
You’ll have to go there physically and open one up, but they’re not going to, it’s not going to be a question as to why is somebody from Australia, somebody from Switzerland coming to the US open up a bank account because the US is, wants to be the marketplace for the world. So that’s not a problem. And you want these major banks because they’re accustomed to international wire transfers. If you have an account at a US bank, nobody’s going to question that from an anti money laundering perspective for trying to transfer money back to Australia, as our thing is, you know, it’s widely respected as opposed to like a BVI bank or credit card. And the other thing the US does that is the information sharing between countries about how much money citizens have in foreign bank accounts.
Clinton Donnelly:
The US has one called the FATCA law. All the banks of the world have to tell the US IRS twice a year about the American bank accounts in foreign countries. In response to that, the OECD countries created the common reporting standards, CRS, which at this point, I think about a hundred countries have signed up to where once a year, they will report back to the citizen’s home country, the total amount of your bank account. So the US didn’t sign that the US did the sign of the common reporting standards, the US you have a bank account in the US. The US doesn’t tell any other country about it. So, you know, it’s kind of.
Stephan Livera:
Ironic,
Clinton Donnelly:
I guess that’s maybe like the bully. They demand that everybody give my information to them, but they won’t share with everyone else.
Clinton Donnelly:
But this is because they’re the biggest financial part player out there. They can actually have this, whereas it is considered a bit of a tax haven, low tax jurisdiction, but for everybody, who’s not a United States citizen, this is 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 safest banks in the world, invest in some of the best real estate, the country wall street. I mean, there’s a lot of it’s a rich financial area in the very strong incentives. And you just got to a US credit card you know, like a Bank of America credit card use that the rest of your life, buying things all over the world and your local jurisdiction would have no visibility to it unless you disclosed it to them. So that’s a very attractive one to do without having to, you know, change residence.
Stephan Livera:
Right. I see. So that would be the model. That would be one idea if you don’t even want to actually become like a US citizen and all of that, you just opening an account in the U S and so I guess then there’s the other options as well of actually like moving, or actually let’s say getting residence in say BVI or multiple places I presume that’s also an option that some of your clients might explore as well. For some of them, it might be worthwhile for them to consider that?
Clinton Donnelly:
I do a lot of consulting in this area for virtually every country the principle of taxation is that if you’re in the country more than six months, then you’re subject to taxation in that country. Typically you’re subject to taxation on your worldwide income in that jurisdiction where you’ve been living 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 it’s based on residency. Residency is typically defined as six months or 185, 183 days. It varies how you define it, but roughly six months thing. So 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 time period, then you can just keep moving around.
Clinton Donnelly:
It’s kinda like the digital nomad strategy. You keep moving around. Nobody’s, you’re not gonna have to report taxes to anyone.
Stephan Livera:
So that’s presuming you’re not a US citizen, right?
Clinton Donnelly:
Assuming you’re not a us citizen. Now, US citizens have a different problem. US citizens are taxed on their income worldwide. However, there are two massive tax breaks that are given to them. One is for every dollar they pay in taxes to a foreign country. They get like a dollar to dollar credit back on their own tax bill. Okay. That’s nice. Relatively speaking, the US taxes are lower than most other countries, developed countries. So if I were a citizen, I have clients living in Germany and their German tax bill is greater than their US tax bill. So we still do a US tax return.
Clinton Donnelly:
They take the German credit, and they don’t, they don’t owe anything back to the US however if you’re an American citizen, you’re living in a low tax jurisdiction you’re still going to have to report back to the US and probably end up paying taxes back to the US. Now for American citizens, there is a fantastic loophole called Puerto Rico. Now Puerto Rico is a little country South of Florida next to Cuba, this area it’s 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. If you’re a possession you’re treated kinda like as low you’re living in a foreign country in Puerto Rico of all of US possessions negotiated the right to tax their own citizens. So you’re not, if you’re a Puerto Rican citizen, all your income comes from being in Puerto Rico.
Clinton Donnelly:
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 and now Puerto Rico, a Caribbean country, not a lot of indigenous resources. They’ve been crushed by earthquakes, tsunamis, hurricanes. I mean, the country is bankrupt. However they’ve created a incentive that they call it’s now called act 60 formerly act 22, where it’s a 0% tax on your capital gains. So if you move, so if you’re an American and you’re whale and you want to do this, you can move to Puerto Rico. And it’s really means move. It’s not like go visit for a day and then go back to California. No, you really are moving to Puerto Rico for at least six months of the year, in which case, a 0% tax on your capital gains when on the Bitcoin that you sell when you’re in Puerto Rico. And this is, that’s 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 had to buy a house or apartment in Puerto Rico and you can’t rent it out. So there’s 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. Yeah. So that’s a very, very nice breakdown there. So I guess breaking that down. So if you’re a non us person, then it might make sense for you to do this whole three different countries, different residencies, et cetera. But if you’re in the US potentially one idea is moving to Puerto Rico. One other idea I was interested to discuss or related to what we were just saying is what it takes to break your nexus with your home country. Right? So, as I understand, it’s kind of like, you have to sort of break that as you said, it’s mostly about the six months or 180 days aspect. Are there any other things there that people have to think about in terms of breaking that connection so that they can be can access the lower tax rate?
Clinton Donnelly:
Usually getting a divorce helps. Just silly. But yeah, I mean, usually it’s like, I want you to go back to visit mother and that sort of thing, you know, you’re, there is a bit of travel to it. I mean, you’re basically, if you take that strategy, you’re at least saying I’m going to be outside. Depending which country you’re from outside of that, my home country for, you know, nine to 11 months of the year, at least. So if I would say a couple of things to think about there are, you know, think of cost of living, think of creating for your family you know, awareness of other cultures. Okay. Speaking other languages. And you know, there are websites. I think if you search for inaudible costs, living in different cities, there’s a couple of websites like.
Stephan Livera:
Or something like that. I can’t remember. Now
Clinton Donnelly:
There’s several websites where you plug in, you know, two cities and they’ll tell you the comparative cost of living. And I’ll tell you, it’s the cost of living changes a lot between different countries. And I think it’s also.
Clinton Donnelly:
You know, I just think it’s a great thing to do is once you start traveling, you get the bug. Now, what I find is I’ve worked with digital nomads as they travel a little bit, and then they decide to have a home base and they stay there, you know, five months a year, and then they move around or they, you know, that sort of thing. But 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, but you know, or at least in wallets, and then use US banks, you can really move towards a pretty close to zero tax situation and see the world at the same time.
Stephan Livera:
That’s very impressive. I think. So I guess, I think another area that you were touching on as well, Clinton was just around the dynamic between the different countries of the world, right? So as you were saying, some of the, it’s almost like there are certain pressures where some countries try to push onto each other of reporting taxation levels. And so, but then there’s also this dynamic where you were saying that it’s almost like the richer countries allow certain nations to keep lower taxes and to have kind of relatively less kind of rules around that. Could you explain that dynamic a little bit for us?
Clinton Donnelly:
Well, there was a real concern right before globalization in the eighties, starting in the eighties that we had issues with international drug trafficking. We had people like Ferdinand Marcos in the Philippines who pretty much looted his own country and took the proceeds. He took it to Swiss and Liechtenstein banks and trust. And so the international community got together and said, we have to stop this. So they created anti money laundering laws, which are coordinated through the financial action task force, the IMF and the OECD is the organization of developed countries about 34 countries. And they did not like tax havens, either tax havens, you know, like Seychelles, BVI, Belize these little countries that were basically siphoning off a lot of money and bringing no value you know, 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 basically made it a club of the haves, right.
Clinton Donnelly:
So, you know, the OECD countries treat themselves as a, you know, A+ countries for putting your money in everybody else is dodgy gray and people don’t want to trust them. So that really crushed the small Island tax Haven network. But at the same time like in Europe, they realize in Europe we have rich countries Germany France, but we also have very small countries, Luxembourg, Netherlands, who have very small revenue streams and they need to allow them to have more latitude to have incentives or lower tax options to bring business there. So well, EU is very good 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 a massive competition. I mean US used to have some of the highest corporate tax rates.
Clinton Donnelly:
It was at 35%, I think in France was higher. But then the UK and Ireland slash their corporate tax rates, significantly UK slashed it down to 20% on a phased method. The Ireland brought it down for foreign countries working in Ireland down to 12 and a half percent corporate tax. This is a very big incentive. This is part of the reason why Google, Facebook, Apple all moved their call centers to Ireland. So a couple other reasons too, but you know, so what the US did in order to change its international competitiveness, as they slashed their corporate tax rates down to 21%, which makes it exceptionally aggressive. And it’s designed to bring big companies who might have been in other countries to bring them back home to the US so there is a real war going on for the tax revenues of multinational corporations by countries that are lowering their tax rates to bring them in.
Clinton Donnelly:
So this is only gonna get more competitive, and it’s going to be, as countries start to do that, they’re going to have to fund it by putting more of the tax burden back on the individual. I know, like in the US I was looking at a pie chart and individuals pay roughly 80% of all the taxes in the US did that to the IRS, the rest of its corporate taxes. Now, the argument would be if I put a tax on companies that make shirts you go and buy a shirt in Australia Stephan and then your shirt is going to be more expensive because you’re paying the company’s tax, right? So company taxes are indirectly attacks back on the individual. Now we, as individuals can vote with our feet just as I talked about a three country shuffle, you know, keep your assets in the US you know, we’re seeing the exact same struggle in the US we have some really high tax States like California and New York, and because of remote offices and this sort of thing, people are starting to flee out of the big States out of New York and LA, California.
Clinton Donnelly:
They’re not willing to pay high property taxes, high sales taxes, high income taxes anymore. So we’re in a period of transition where we as individuals have a lot of power to change the tax dimension of our life, and to make sure we’re getting as much value as we can out of the money we’re having to pay.
Stephan Livera:
Oh, that was an incredible breakdown. Actually, we saw a really cool comment. Stephan, this is awesome information, man. That was great. Great information there, Clinton. I think one of the really interesting things there is that dynamic that you were teasing out there that there’s this kind of competition between different countries and for some of the smaller ones, like say the BVI or Vanuatu, and some of these other small countries, part of their competitive the way they compete is by having, you know, low tax and so on. And so, and for some of them, I guess, the offshore investment or the citizenship by investment programs that they offer are part of a good part of their taxation is that part of their revenue, that’s part of their kind of way, how they kind of make money. I guess,
Clinton Donnelly:
Interesting country in South America is a country called Panama. And Panama is a very interesting, it’s kind of it’s own country, but everybody knows that if anything gets unstable there, the US will invade it in a heartbeat because of the Panama canal. Now, what happened is Panama has a tax regime where if you draw, if a company or an individual derives their from outside of Panama, then it’s not taxed in Panama. Okay. So it’s a real territorial system, a true territorial system. So what’s happened is that multinationals who want to do business all over Latin America set up their headquarters in Panama, and they make all their money in Latin America back in Panama, Panama doesn’t tax it because it’s a drive from outside of Panama. All right. So this is just a phenomenal arrangement and that has enabled Panama to attract incredible amounts of business because almost all the Latin American countries are unstable Argentina, Brazil, Colombia, Venezuela.
Clinton Donnelly:
I mean it’s a very unstable mess there, but Panama has the strongest banking system in all of Latin America problem is it has a little bit of a shady tax Haven was blacklisted once. And you know, it’s got a lot of issues it’s moving to progress and improve things, but I would keep an eye on it. Also, so if you were an individual living in Panama, you’re not an American citizen. So any other country, they’re not going to tax your income. If you’re a remote worker, cause you’re getting your income from outside of Panama. And it’s a nice tropical country. I speak Spanish, a little bit of English you know, great airport.
Stephan Livera:
Right? And so I guess the other thing there is the question of getting like residency, citizenship and so on. I mean, you might not necessarily need citizenship, but you just might need the rights to live there and work there.
Clinton Donnelly:
Oh, easy, go to Panama. Put down 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’s one of them, you know, all of Europe, pretty much you get a friendly nations visa and you now are a permanent resident of Panama. You need to go visit two weeks every two years. But otherwise you have, you can set up bank accounts and you’ll have residency there and you could travel all the, world and still say your Panama citizen, keep your bank or your business operating out of Panama. You know, so you’re not gonna be taxed because it comes from outside of Panama, very unique regime.
Stephan Livera:
Yeah. It’s interesting because I’m thinking back through kind of Bitcoin people or people who’ve famously attacked Bitcoin people like Peter Schiff, he talks about, well, he’s in Puerto Rico, as I understand, I don’t know. I think even like Eric Voorhees has talked to, I went to.I think I’m not sure correct me if I’m wrong, but I think he might’ve gone to Panama at one point. But I think the other point I wanted to raise as well is obviously everyone’s got their own different view on you know, the justice of taxation and AML laws. Obviously you might be against them, but I think one factor that is potentially playing in the favor of the individual is that, well, I think a common book that a lot of people read is the sovereign individual. And part of that is like this idea of going to better countries or going to better jurisdictions for better tax laws or other laws as well. And so
Stephan Livera:
I think perhaps it’s like most people grow up and they have this inertia, okay. I grew up here, so I’m going to live here and I’m going to die here kind of thing. But perhaps we’re moving more into a world where people can work remotely and then they can start accessing some of these overseas tax planning and overseas tax structuring that may improve the level of competition between the different countries. And ideally keep it a bit lower for the individual. But what do you guys do? What do you guys think?
Dennis Wohlfarth:
Yeah, I mean, yeah, I think that’s, I guess it’s really one big part. I guess what Clinton also said is just, you have to think about where you want to spend also like the next year, right? I mean, as out of my personal experience, I moved to Switzerland to Zug like the crypto Valley or at least what they call it because we also started our company there.
Dennis Wohlfarth:
It’s obviously 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? You, 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 and otherwise there’s other country would taxi you on your crypto income. So it’s kind of like, and also the 185 days, you have to be there. You have to be in this other country. So you need to be aware of the cultural differences. You need to be aware. Obviously, if you, if you speak a different language, you need to be aware of that. You want to, like, you really need to think about cost of living, especially in Switzerland and Switzerland, for example, it’s completely different from area to area.
Dennis Wohlfarth:
So it’s not just, I moved to the border of Switzerland. Like to the, if you come from France or from Italy or Germany, it’s, you have different areas and they’re small, like Zurich, which have really good taxation law and crypto, because you don’t pay any taxes, you just pay wealth tax at the end of the year. But still it’s, it would be easy for European citizen to move there. You just have to keep in mind that you kind of give up your home or your like where you grew up. Obviously you can back in the future. But it really depends on your personal situation. If you have a family it’s maybe even harder to move there. So yeah, I guess like the future of all these taxation laws, and especially for crypto, I guess, like Clinton said before, that’s going to be another five or 10 years until they figure out the correct regulations there.
Dennis Wohlfarth:
Me personally, and like our, our team, we are encouraging everyone to accept these regulations because it also brings crypto to the next stage, right? It’s not just, it’s not just a bad thing. If if there’s new regulations coming in, it’s also, you have a better guideline. You would know exactly how to behave. And with that guidelines, you can actually find loopholes to go around these taxes. If you don’t have any guidelines, it’s really hard to decide what to do, because it’s just not defined yet by the governments. Right? So that’s, that’s also a big, big part, I guess, affordably.
Stephan Livera:
Yeah. Clinton, anything to add?
Clinton Donnelly:
I was talking to a client he was from Serbia and he said he had lived through the time and when Yugoslavia had broken up, then it became very lawless and there was no real central government. And you know, the criminal element kind of dominated the law and order and stuff. And 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, it was chaos. I want to pay taxes. I want a stable government. I thought, wow. It was really refreshing because so many people think that even paying a dime to a government is some sort of crime, but there really is a value that governments give to you. And I think as you were saying Stephan and that there’s, you know, we should become shoppers to a certain extent.
Clinton Donnelly:
We can make choices about the tax impacts on our lives. What the government governments, generally like you to do is to stay put in one spot. It never moves 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. So, I think this is how could I describe this? I mean, tax burdens are outrageous, worldwide. Okay. And it has to do with the amount of services we expect governments to give us. We want the governments to give us a 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. If they’re, you know, to make things better and regulate and define what it means for things to be organic and all these sorts of things, let’s have the government do it every time you say the government ought to, you gotta rephrase it in favour of,
Clinton Donnelly:
I would like to pay more taxes so that the government ought to, you know, and governments never shrink themselves. So the only way that you can vote sometimes just with your feet and go move somewhere else the grass isn’t always greener on the other side. And you know, if you have very strong family ties and you love going visit, you know, the big family on Sunday and having a pasta dinner, you know, you’re gonna to miss that if you take off and go live somewhere else, I mean, but you might replace it with something more exciting and adventurous in your life. So there’s a big you have to look at the whole picture. It’s not just the tax issue.
Stephan Livera:
Of course, of course, I think those are worthwhile points. I think it just kind of depends on your view of how things play out. Like maybe you believe there would be, you know, private provision of these.
Stephan Livera:
Other things and you know, less taxation to the government and more just kind of, you just pay privately. And hopefully that those private services might do a better job and maybe that’s the way you would think about it. But obviously you’ve got to, I think the key point here is kind of assess holistically. And I think talking about and understanding how the taxes work is one, obviously one important part of that picture. So I guess if you guys have got any kind of closing thoughts for the listeners and also where can my listeners find you online?
Dennis Wohlfarth:
Yeah. So, I mean, one more thing, especially because there’s no like no final regulation in most of the countries, you can use that in order to argue a little bit, right? I mean, it’s not that you, I mean, you can save taxes in every country, even if they have a 50% tax rate, like in Germany for the short term taxes like the maximum, but you can still argue about some forms of income in crypto because there’s no final regulation rights. So you can kind of try to shape that a little bit, moving into the future. And there’s obviously no guarantee that this works out and this, that that you, that they accept this, but you can at least try. And we in accointing, we work together with German CPA’s with like and all the other countries that we cover as well.
Dennis Wohlfarth:
And especially also with Clinton, where we basically advise our users, if they have some questions there. And if they want to have a special regulation, especially if you have a little bit more in crypto, when you have, like, where would it be worth to deep dive into when we always advise them to talk to Clinton or to some of our partners in other countries and other jurisdictions. They like it sometimes helps. There’s always a little bit of movement that you can do. And there’s always a little bit of money that you can save. So I guess that’s one important thing to think about. And like you said, lastly, you can find us on http://www.accointing.com. So not accounting, but it’s like just the “U” the “I” instead of the accointing.com. And there’s also linked, to Clinton’s website and yeah, if there’s any questions, just reach out to us and we hopefully can help.
Clinton Donnelly:
First of all, it’s a pleasure Stephan, to be on your show and to talk about these really interesting things. People can reach me donnellytaxlaw.com Donnelly is two N’s, two L’s and you can schedule a consultation with me. We do full service tax preparation for us citizens. We also do just wanna, you know, have a half hour tax planning consultation, you know, we could do it there. You can schedule a time, pay for it upfront inaudible at the time, that’s convenient to you. Like I said, we have clients all over the world, so you can find a time slot that works for you. We also specialize in doing tax defense in audits, people who are being audited by the IRS. We actually are one of the first companies to actually do a crypto audit for American citizens. So we have significant insight. There we have a company of about nine people right now, and it’s growing very fast. So I look forward to talking to people about their tax needs and I wish everybody to pay a lot of taxes. That means you’re making a lot of money.
Stephan Livera:
Yeah. Look, thank you very much. I mean I obviously I’m not, no, one’s a fan of taxes, but I, it’s worthwhile thinking about strategies around taxation and I’ve very much enjoyed chatting with you, Dennis and Clinton. Thank you for joining me.
Clinton Donnelly & Dennis Wohlfarth:
Thank you.
Stephan Livera:
Thank you. And listeners, you can find my show @stephanlivera.com. That’s it from us. We’ll see you guys in the citadels.