LLC PASSTHROUGH FOR CRYPTO INVESTING

 

Why do you believe that because the IRS changed its “1031 exchange” definition from “property” to “real property”, that it somehow imposes a new tax on crypto-graphic currency? There is no tax on crypto-graphic currency, assets, coins or tokens. However, the centralized exchanges have now been forced to help create the illusion that you owe taxes by producing income reports, such as the “1099”. Your accountant will dutifully include these reports in your tax return, and that is when the “income” becomes taxable, but only because you said under penalties of perjury that the income was taxable. What is being taxed is your gain in the dollar and the presumption is that the 1099 shows you had taxable gains. Even though the burden of proof is now in the IRS, you are reporting under penalties of perjury. Maybe you figured out how to report a loss because maybe you had a net loss from “cryptos”. Wouldn’t you rather avoid the issue altogether, get your money when you want it, and then deal with any tax issues on terms that you normally do, so any gains have nothing to do with cryptos? How about deferring any taxes, even if you do have a taxable gain, into the future for as long as you want?

The exchange is already acting as a trustee by virtue of it holding your private keys. Let me show you what I’ve been doing since 1994 and how we can use these same strategies to maintain the correct accounting and avoid any tax situation. I created a special purpose LLC organization in order to solve and prevent any tax problem for those who are still using the centralized crypto-currency exchanges, such as Coinbase. There is no reason to incur any tax liability when using these exchanges; however, it appears that most people don’t understand how to set up their accounts and simply do the same thing they are used to doing with banking. The purpose of this trust is to provide a traditional solution to what might be a new tax situation.

Each blockchain based coin, token or asset can operate in a trust relationship because the nature of the blockchain is an association of computing devices networked together and managed by people. Changes to the manner in which the blockchain operates cannot be changed by a single beneficiary and there must be a consensus with network managers for any changes to take place. The blockchain is already performing the same functions as a trustee because it is a distributed ledger, giving access to the ledger in a real-time basis. This is the perfect organization to function as a trustee; likewise, no law requires anyone using these coins or tokens to do so in his individual capacity. First, control over the asset is already given up because of the system architecture of the blockchain. Second, ownership is already maintained by virtue of the exchange owning your private keys. The public and private keys operate like trust certificates.

You can do your own research, but I just wanted to make this point. Some of you incorrectly believe that “gains” between cryptos are taxable. Let’s use the example of moving “your” Bitcoin from Coinbase to another centralized exchange such as Kraken. And let’s say you funded your Coinbase account with $1,000 of after-tax currency (USD). Assuming your principal doubled in value for example, you send $2,000 worth of Bitcoin to your Kraken exchange account to buy Litecoin (or even more Bitcoin for that matter). Now, let’s act as if there is a taxable gain here and we arrive at the end of the tax period with this gain. The owner of the private key is the de facto trustee, being that you are the grantor who funded the account, and it is the trustee in this situation which has realized the gain. If it is in fact taxable, then the trustee must report to the IRS and remit the proper tax payment. Remember, this is before going back into fiat dollars. This is a very easy test to demonstrate why exchanges between crypto-graphic currencies, tokens or other assets is not taxable. Let’s say you, the grantor in this example, then move your $2,000 worth of Bitcoin back into your dollar account at the bank. There is a presumption of an income tax liability. If the correct accounting were reported, you would have a tax on your gain of $1,000; likewise, if your $1,000 was reduced by 50% because the dollar price of Bitcoin fell, you would be able to claim a loss and maybe even qualify for a deduction, in dollars. Why? Because you received a disbursement from the trust, which is taxable. This is nothing new, like I’ve explained before, the tax has always been there since we began taxing profits and gains, there is no new law needed to collect taxes from crypto-currencies. The tax falls on gains earned from buying low in dollars and selling high in dollars.

Let’s talk details. The trust relationship is not incorporated and does not derive its existence or function from any statute or legislative enactment. It is simply the relationship between the account holder and the exchange.  I have used this fact to ask the IRS for a legal determination in a list of cases where the account holder (a non business) received a 1099-K or 1099-MISC or similar, but did not receive any dollars.  The IRS has always agreed that the particular 1099 should be excluded from the 1040 tax return.

Here are some more frequently asked questions and answers:

>  This trust is not for estate planning purposes. It is a special purpose trust that identifies the trust relationship with third party owners of private keys to your crypto-graphic currency, such as Coinbase and other central exchanges.

>  Using this pass-through will avoid taxable gains between crypto-currencies. It is documented in the operating agreement.

>  The LLC is a tax deferred organization if it is used properly.

>  There are no tax penalties provided that the LLC are used for their intended purposes and they follow the rules for which they were organized.

>  It’s prudent to avoid putting your faith into whether or not an attorney has reviewed anything as most of them are unwittingly or deliberately setting up people for the most taxes possible. Most attorneys want to claim that everything they are not selling is somehow not legitimate, so it’s difficult to get an unbiased opinion from an attorney on something like this.  However, these strategies are not entirely new, that is, changing property rights to avoid liability has been commonly practiced in business and investing for centuries.  I’ve just applied it to the twenty-first century.

>  This strategy avoids litigation and is not controversial and has stood the test of time in terms of not being challenged in the courts or by any government agency.

>  Once you have the proper structure in place, we can show you how to disburse funds to buy a home, other property or large ticket items or assets without incurring any immediate tax consequence.

>  Using this structure does not need to change your personal tax situation, you may continue to report and pay the same way you always have, with the additional benefit of deciding how much of a windfall you are willing to be taxed. Your usual taxes would be on your personal living expenses (income to pay those) but your net worth does not need to change (on paper).

If you already have an LLC that you can or are using with an exchange, I will need to see a copy so that I can make the appropriate amendments. If you don’t have an LLC and want to easily avoid a taxing situation with an exchange, I can register an LLC for you in the appropriate jurisdiction. If you’re in California, I prefer to avoid that state if at all possible. Once we have your new LLC in place, I will provide you the documents you need in order to open its bank account so we can then include the property classification and pertinent clauses so you can open your accounts.