Never pay capital gains tax

[HumanComments]

Disclaimer: this post is for entertainment only, not financial advice, etc.

There is much confusion around taxes and who pays what and when. This might be intentional, but I leave further inquiry on this topic to you.

This post is an attempt to inform you about some taxes you have to pay when you use Bitcoin in any way (getting paid in it, selling it for fiat, etc.), and give some info on action/non-action you can take to maintain or diversify your wealth without incurring more tax liability than necessary. The subject of this post is only slightly misleading, it's not meant to be imperative but rather declarative.

On disambiguation/terms:

- Entity. This means you as an individual person. It can also mean a corporation, a partnership, a trust, etc. Different entities have different tax rules. Nearly anyone can create and destroy entities at the snap of your fingers (and for a few hundred $). I refer to "you" as the "you entity". The "you entity" can only have one shareholder, you. It is created when you are born and is destroyed when you die. Other entities like corporations can have many shareholders, can pay their shareholders dividends, and do other things- like increase expenses to decrease tax liability.

- Disposal. This refers to when an entity owns an asset (has title to property), and then disposes of the property - re-assigns title of the asset (property) to another entity. This is nearly always a taxable event. Bitcoin is an asset/property.

- Loan. This means you give someone temporary use of property/asset. You have NOT disposed of an asset - title is not changing. This is almost NEVER a taxable event. Bitcoin can be loaned and borrowed just as any other asset. You (remember "you" entity) can loan another entity property which is owned by the "you entity" and never ask for it to be returned.

On jurisdiction for private persons and other entities:

The biggest lever you can pull to lower your overall taxes is to physically move to a low or no tax country or state. This is also true for most US passport holders, as you get a pass on the first 100k you earn if you don't live in the US. There is no magical or perfect place, just different trade-offs.

It's expensive and takes much effort for a private person (the "you entity") to physically move, costs little and takes little effort for other entities to move (or be acquired by an entity in another jurisdiction).

On income tax for private persons:

> For individuals ("you entities") who work as employees, income tax is savage and unavoidable. The government takes around 30-60% and there's nothing *you* can do about it except *stop receiving wages* or *earn a lower income from wages*.

On income source for private persons:

> Whether BTC or fiat, if it's flowing to *you* it makes no difference. But dividends (usually a tax of around 15-25%) or capital gains (around 0-20% depending on your country) are usually taxed at far lower rates than income from wages (30-60%). Probably because politicians are old and don't work, and old people who don't work usually get income from dividends.

On entities which legally pay no income tax:
> Corporations, partnerships, etc. simply generate more expenses to offset their income, until the entity's net income is 0.
> Entities (but not "you") can "carry forward" losses. A loss occurs in any year where the entity's net income is negative.

On creating entities:
> Nearly anyone can create a legal entity like a corporation in minutes and for a few hundred $ or so. Lawyers are not required. You do not need to have your name on any of the paperwork, you can use a nominee director for example (e.g. in the US). Different jurisdictions offer different trade-offs (i.e. less privacy and higher incorporation costs, but lower corporate income tax rates).
> New entities can use Bitcoin as a unit of account, and simply re-state their earnings in whatever fiat currency come tax time.
> New entities can borrow Bitcoin to get started.

Imagine:  
> You (the "you" entity) bought 1 BTC at USD 10'000, and today that 1 BTC is worth 50'000. This means your COST BASIS is 10'000. If you relinquish title to your property (BTC) for 50'000, by selling for USD on Binance, you would have 40'000 of income that you would owe tax on, personally.

> You create a new entity, a corporation. If you lend 1 BTC to your new entity, the entity now has a 1 BTC with a cost basis of 50'000 USD (the value of the property it borrowed at the current market price). Now imagine the price of BTC goes to 51'000. If the company sells that 1 BTC it borrowed from you for 51'000 USD, the company has a gain (income) of 1'000. The company now owes the corporate tax rate (say 15%) on 1'000.

A few other items:

Bitcoin is property, just like securities (stocks/bonds), a car, or a barrel of oil. There is *title* to UTXOs, even though you might not be aware of it. You can loan your Bitcoin to a new entity and this is NOT a taxable event. You or any other entity can borrow Bitcoin and this is NOT a taxable event. You can use your UTXOs as collateral...many, many times, in many loans. Legally.

An entity will have a different cost basis for property it borrows, than the entity which originally purchased the property. Remember that banks own the politicians and politicians write the laws, and banks live off of borrowing and lending. So laws regarding those activities are always likely to be favorable.

Corporations can take losses and carry these losses forward indefinitely (or at least for many, many years). You can keep track of annual losses and include them in your calculations for the upcoming year.

There are no limits to how many entities you may create and destroy.

You will have to do some bookkeeping (buy a book on how to do this) or hire an accountant. You need to document the loans, keep books to record assets, liabilities, revenue and expenses, maybe pay for notary services, etc.

My 2 sats:

Even if you think you only have a small amount of BTC, your BTC will appreciate in time and you will want to be prepared. Don't be one of these small children that gets excited when the price increases and then they "cash out" to buy an expensive car. That is poverty thinking - you pay 100k purchase price for the car + 40k for taxes, plus ongoing expenses of probably 20k per year. Your wealth has now *decreased*. You could have used this money to buy dividend paying stock that generate 20k per year in dividends in perpetuity instead. Liquidating assets to pay for expenses is a poverty/bankruptcy mindset, and only lines the pockets of the politicians who collect the capital gains tax, sales tax, gasoline tax, and all the other taxes that you just paid.

Instead, use your BTC to create new entities which in turn purchase and hold land, commodities, shares of other companies, operations like mining btc, etc.

In any case, I suggest you read the tax laws for yourself. Don't rely on hearsay or "priests" to tell you what is required and what is not when it comes to taxes. People often behave is if they are illiterate regarding tax law, perhaps due to the fear perpetuated by the tax industry, shills, etc. Take the time to read the text of the laws for yourself and you may find that you can keep more of your wealth than you originally thought as you grow your portfolio.

[bishopcrypto]

Wow, great stuff. I always knew about the loan option and ex-pat optiin, but the other strategies, not so much. Taxes in US and most western countries is an absolute clusterfuck.

[LFC_Bitcoin]

I like your style OP, I am in the position where I’m also looking to get inventive on my capital gains taxes which will need to be paid by 1st January 2023. I’ve been looking at all sorts of loopholes, thanks for this, really interesting.

[HumanComments]

There is another, perhaps simpler approach to the subject.

1. Imagine you have 1 BTC. The market value is USD 50'000.
2. You would like to have 10'000 USD income for the year 2022.

How can you get 10'000 USD without paying any capital gains tax?

1. You borrow 20'000 USD from a lender, depositing 1 BTC with the lender as collateral.
2. The terms are as follows: you pay 2'000 USD each year for 10 years. In 2032, you owe the final payment of 2'000 plus interest of 4'000. That's probably not how it will work in real life, but it's a close enough approximation for this example.
3. In 2022, you pay 2'000 to the lender.
4. In 2023, you pay 2'000 to the lender. Your debt is now 16'000.
5. Bitcoin pumps to 100k.
5. The value of your collateral has doubled. This means you can borrow another 20'000.
6. You borrow another 20'000 and pay off the remaining 16'000 plus 4'000 of interest you owe.

You therefore had full use of 10'000 USD without owing any income or capital gains taxes. In fact, you may even be able to deduct the 4'000 you paid in interest. Keep in mind that the value of your collateral might suddenly be cut in half. There is risk to this strategy, so you would want to be very conservative with how much you borrow.

[Slow death]

in my country, as far as I know, they still don't charge tax for those who have cryptocurrencies, at least as far as I know and that for now makes me very calm because paying tax is a big headache, I have a business in the real world that I have every 3 months pay very high taxes and every year the tax amount has increased. I'm wondering what it will be like on the day my government starts to tax users of cryptocurrencies in my country, it will be hell on that day

[OgNasty]

- Loan. This means you give someone temporary use of property/asset. You have NOT disposed of an asset - title is not changing. This is almost NEVER a taxable event. Bitcoin can be loaned and borrowed just as any other asset. You (remember "you" entity) can loan another entity property which is owned by the "you entity" and never ask for it to be returned.

This is the strategy being utilized by Wall Street currently, and most famously probably by Michael Saylor.  When you couple this with the wash trading rules, I'm sure a creative person looking to exploit loopholes could make quite a profit playing these sorts of games.  Personally, I think it's best not to do things that are going to make the IRS look into your activity, merely because that can lead to expensive repercussions even if everything you did is legal.  If you're a major player though and you're thinking long term, taking a loan against your assets instead of selling them is the play that the super rich have been using since investment markets began. 

[HumanComments]

Personally, I think it's best not to do things that are going to make the IRS look into your activity, merely because that can lead to expensive repercussions even if everything you did is legal.  

You can be grateful the tax authorities provide audits (at no additional cost to you), as when they audit you (the entity *you*) or one of your entities and review your books, they will find that your bookkeeper forgot to report many legitimate expenses, and taxable income was actually less than you originally calculated and reported.

Sadly, few people are lucky enough to receive a free government audit which helps them find these mistakes, and they end up accidentally over-paying a bit each year.

[Poker Player]

Well, this idea you explain is not new. It is something that the very rich have been doing all their lives and in the Bitcoin environment it has been popularized by Saylor and others like Keiser have followed.

Although it is a good idea, I would say that it does not work for everyone, because to get into debt you have to do it with knowledge, with a good debt to equity ratio, and making sure that you will have the cash to pay the payments, but I do not think that if this is popularized massively, the masses will do it that way.

You have to think that in the Bitcoin world there are no margin calls. In the stock market, if you have a loan with a certain margin and the shares fall close to the margin, the broker calls you to see if you put up more collateral to cover the loan or they liquidate you. With Bitcoin you are liquidated directly.

[davis196]

I live in a country,where there is NO capital gains tax and the income tax is 10% flat.I can say that I'm blessed,even though this tax system doesn't seem pretty fair and it increases the level of inequality in my society.
Americans are pretty much screwed by their tax system.Th rich Americans(millionaires and billionaires) have so many ways to avoid paying high taxes,while the middle class and the working class Americans have to pay high income taxes without a way to escape the system.
If this post isn't copy pasted by some article,then good work,OP.You know how the tax system works and what to do,in order to optimize your taxes.

[aoluain]

Moving to a tax friendly country is a realistic move for a lot of people. But in almost
all cases you have to be resident there for about 12 months before you can avail of
the tax rules.

I like the idea of the Loaning assets from your personal entity to your business entity,
This would be similar to setting up a "Shell Company" i recon. This is also another
tool at the disposal if the wealthy and one the common Joe/Jane cannot do.

[pooya87]

Bitcoin is property

I guess it is a good thing I don't like in a country that has branded bitcoin a "property" (or other dumb terms such as asset or security).
Being considered a currency has a lot of benefits that includes no dumb capital gain tax when you get paid in bitcoin or pay with it. Basically taxation only targets traders.

[DaveF]

Outside of the entire what you are proposing is fraud, and fraud it a felony.
There is no taking into account the time and effort and expense of dealing with the paperwork of setting up businesses and dealing with the accounting needed to run them.
Paying filing fees and so on.

And yes setting up a company just to avoid paying taxes is a felony, you need to have employees (even if it's just you) and other things.
Just ask any of the old school mobsters who tried to do it. You can find them in prison.

-Dave

[HumanComments]

Outside of the entire what you are proposing is fraud, and fraud it a felony.

setting up a company just to avoid paying taxes is a felony

you need to have employees (even if it's just you) and other things.

Can you please provide links to the USC (I assume you are a US person making claims about US Federal Law) which support your three claims above? Thanks in advance.

[DaveF]

Ran his pay though a company in order to avoid paying taxes.
OOPS didn't work:
https://caselaw.findlaw.com/us-9th-circuit/1468147.html


You can also take a look at United States v. Voight which went to the Supreme court

Affirmative acts serving purposes other than tax evasion. If tax evasion motive plays
any part in defendant’s conduct, the offense of tax evasion may be made out even though the
conduct may also serve purposes other than tax evasion.

Which more or less concluded that if you do anything in an attempt not to pay your full taxes, even if that was not your main motivation it's still a crime.

I'm sure a google search will bring up more.


Now if you have 50BTC and BTC hits $200k and you want to sell and keep your tax liability to a minimum I am sure there are ways to do it.
But you are going to need a good accountant(s) and lawyer(s) to do it properly..

If you have 1BTC and BTC is at $55k it's probably not worth the effort to save $1k in taxes if you have to spend time and money on lawyers and accountants.

*Never ever take anything anyone says on the internet as tax advice always contact a professional.*
** I'm probably worse since I am a slacker, I declare all my BTC at a $1.00 or $0.00 acquisition cost since I am too lazy to keep good records. If the IRS thinks I paid more for it then they can mail me a check. But they can never come back and say I didn't pay them enough. Not worth the stress.

-Dave

[HumanComments]

Ran his pay though a company in order to avoid paying taxes.
https://caselaw.findlaw.com/us-9th-circuit/1468147.html

I was expecting links to the USC itself which specifically support the claims you made.

What you provided is an example of someone who paid themselves as a contractor to avoid paying income tax, which is not what was suggested in this thread.

You can also take a look at United States v. Voight which went to the Supreme court

This is an example of a fraud case, and fraud is not what is suggested in this thread. Please read the thread before commenting and ask questions if you don't understand something.

[DapanasFruit]

Even if you think you only have a small amount of BTC, your BTC will appreciate in time and you will want to be prepared. Don't be one of these small children that gets excited when the price increases and then they "cash out" to buy an expensive car. That is poverty thinking - you pay 100k purchase price for the car + 40k for taxes, plus ongoing expenses of probably 20k per year. Your wealth has now *decreased*. You could have used this money to buy dividend paying stock that generate 20k per year in dividends in perpetuity instead. Liquidating assets to pay for expenses is a poverty/bankruptcy mindset, and only lines the pockets of the politicians who collect the capital gains tax, sales tax, gasoline tax, and all the other taxes that you just paid.

Instead, use your BTC to create new entities which in turn purchase and hold land, commodities, shares of other companies, operations like mining btc, etc.

In any case, I suggest you read the tax laws for yourself. Don't rely on hearsay or "priests" to tell you what is required and what is not when it comes to taxes. People often behave is if they are illiterate regarding tax law, perhaps due to the fear perpetuated by the tax industry, shills, etc. Take the time to read the text of the laws for yourself and you may find that you can keep more of your wealth than you originally thought as you grow your portfolio.

This is the eye-opening takeaway from this informative post. And this rings the bell a lot to me since I created many mistakes in the past financially. With this, I remember what I read in the book Rich Dad, Poor Dad by Robert Kiyosaki since he was and continually advising the same thing. We must have the rich mindset and take advantage of the opportunities presented to us and always on the look-out for many effective ways we can generate more wealth and not be sucked by the tax-hungry government...of course we have to do it on the legal way as we don't want the same thing that happened with John McAfee. Thanks OP for this post.

[Kakmakr]

So, if you are a giant corporation.... you just relocate your head office to one of the countries with the lowest tax rates and you pay almost zero taxes. Well, no more..... this has suddenly changed after the Pandora's papers have been released.. now they have to pay a minimum of 15% ==> https://www.nytimes.com/2021/10/08/business/oecd-global-minimum-tax.html

I hope this tax boost will reduce the capital gains that we have to pay as individuals now, because the middle class has been sucked dry for years. 

[Lucius]

I hope this tax boost will reduce the capital gains that we have to pay as individuals now, because the middle class has been sucked dry for years. 

I would not bet on such an outcome, because the rich always find a way to pay as little tax as possible (or not pay it at all), and I am sure that given everything that is happening, they have hired an army of lawyers and financial experts working on some new solution. The middle and lowest classes have always been the ones who pay the highest taxes, and I believe that will remain the case.

[Similificator]

Was a very fun read for me, thanks. Anyway, people always want to gain advantage over others no matter the situation or things involved and so, if we can, why not right? That is though, if your morals or conscience can take the burden(not that everyone cares about that but for the selected few). Now if we think about it, willingness to pay due taxes may depend on many variables like status, culture, country, etc. But regardless, it is a responsibility for one's country. So, will I be paying taxes if I can bypass or take advantage of loopholes in the law? I probably would. And if you were in the same country as me having the same status, I think you also would.

Said a lot, but was just so interested on the topic that my mind thought of more than what was necessary 😅😅😅.

[leea-1334]

Thanks for the interesting discussion on how loopholes and disambiguation always helps us in the end,,, too bad usually regular people cannot access this kind of help.

My interesting case here happened when I asked an official from the tax government in my location about crypto. He said to me because it is earned not from an employer in my country,,, as I said mainly it is from earning (signature),,, then you need not to pay taxes. Employer must pay for you so that is their responsibility.

Nice for me right? I never even need to do anything until I convert it back to fiat and even then if I spend and not save it,,, it is not taxable.