With David Lesperance
A contrarian expert on contingency plans for the wealthy delivers uncomfortable truths.
Recently, the volatility of the world’s cryptocurrency markets has created a great deal of stress for people investing in crypto. In addition, tax authorities in nearly every jurisdiction have turned up the heat. As a result, many are looking at second residences and citizenships as a solution.
It is increasingly difficult to navigate this terrain as a crypto holder with all the recent buzz: It seems that everywhere we look, headlines are detailing the “next big location” in crypto-world. Satoshi Island is one of these currently circulating dreams that is drawing significant attention. With the promise of a society fully operating through cryptocurrency, this tiny island in the Pacific has made claims that crypto-enthusiasts can buy property and escape; to be surrounded by like-minded, tech-savvy individuals.
The problem lies in the legitimacy of these claims. In a series of blog posts, I evaluated whether Satoshi Island is Bitcoin’s Fyre Festival. Spoiler: It is.
In this article, I want to provide a practical methodology for the Crypto Community to properly plan a successful future. Failure to properly plan ahead leads not only to increased stress, but also potentially detrimental losses of time and money.
For a start, there is no lack of promoters in the crypto sphere who are promoting “alternative residences and citizenships.” They claim to provide a means for crypto enthusiasts to meet their combined goals of reduced tax burdens and living an enjoyable lifestyle within a community of like-minded people.
Some say you should just go wherever you get the best terms. This is obvious but not terribly helpful in practice. Others put the cart before the horse with statements like, “First, you need to choose which jurisdiction is the best for you.” These promoters are clearly trying to have you focus on the jurisdiction that they are selling. Meanwhile, they want you to overlook the issue of how you get from where you are now to where you want to be without financially crippling yourself.
Following this advice is like wanting to build a disaster-proof home and starting the process by walking into a DIY store and taking the advice of a brick salesperson. Logically the path to success is to first call upon a qualified and experienced architect to draw up blueprints and then to organise the building of your new home.
The purpose of this article is to provide a step-by-step roadmap for members of the crypto community. Crypto miners or exchange founders may have specific other needs, such as access to energy and dealing with regulatory authorities. Therefore, I will limit my discussion to those crypto enthusiasts who are actual investors or traders.
1st step: Where are you now?
Your first step should be to assess your current tax regime and financial situation.
To begin, analyse and fully understand the current national and provincial/state tax regime to which you are subject. Once you know where you are, you can determine what would be involved in moving yourself to a lower tax state/province or even country. Different locations will have differing tax systems and regulations that will affect the process of both leaving a tax jurisdiction and entering a new one.
Some jurisdictions, such as the US, require that you renounce citizenship in order to leave. Other jurisdictions require that you sever ties with material possessions like homes and acquire new ones in another jurisdiction. Still others require that the new jurisdiction have a tax treaty with the current jurisdiction. Finally, some simply require that you limit the number of future days in your prior jurisdiction.
2nd step: How do you leave, and what is the financial impact?
Once you have a proper grasp on the tax rules around your current jurisdiction, it is then time to determine what steps need to be taken to leave and the financial ramifications of that departure (eg. Exit Taxes).
3rd step: Where should you go, and how do you get there?
Once you understand and accept what is required to leave and the price involved, you need to determine where you are going. This requires an examination of your own and your family’s business and lifestyle needs and which new jurisdictions are best suited to meet those needs.
Once you have narrowed down the list of target destinations, it is time to look at what is required to move to those destinations. At this point, it is worth looking at family history to determine if the acquisition of a lineage citizenship is possible. Note that a claim to a citizenship in any EU/EEC member country gives access not merely to that country but also to all 27 member states. Furthermore, spouses and children who may not qualify for that lineage citizenship are also allowed to reside in any of those countries.
If there is not a lineage citizenship claim, then proceed to a thorough exploration as to whether residence can be obtained through education and work experience, agreement to reside for long periods of time, or through business activities. Only as a last resort should one look at residence or citizenship by investment.
4th step: How can you reduce or eliminate your global tax burden?
Once you have a clear understanding of what it takes to leave your current tax home pot, and what is involved in moving to your target destination(s), you need to seek proper advice to make sure that you don’t land in another jurisdiction’s tax fire. Depending on the jurisdiction, you can achieve a favourable tax/lifestyle balance by ensuring your destination does not levy income or capital gains taxes (or restricts it to local source only), or by conducting proper pre-immigration planning.
5th step: Putting it all together
With a clear idea of the costs and benefits of acquiring a “Fire Escape Plan” and the steps and timing to execute such a plan, the way forward is clear and without surprises. This is the blueprint to decide whether or not to move forward and, if doing so, to ensure success.
- Step 1: Understand where you currently stand and what is needed to move.
- Step 2: Understand what happens if you leave, and plan to minimise the pain.
- Step 3: Understand you and your accompanying family’s needs, preferences, and desires, and determine which jurisdictions (or combination of jurisdictions) will meet your family’s needs.
- Step 4: Determine cost and tax-efficient ways of entering your chosen jurisdiction;
- Step 5: Put together and execute an end-to-end plan that maps out all the costs, steps, and timing involved in executing your family’s strategy.
When should you begin planning?
The US and other countries’ tax authorities are now laser-focused on collecting tax from the crypto community. In fact, the IRS has titled their special efforts in this area Operation Hidden Treasure and the soon-to-be-passed Inflation Reduction Act contains an additional $80 billion in funding for the IRS.
This means that those in the crypto community who want to want to successfully navigate themselves to a future free of financial pain do not have time or money to lose. Failure to plan properly is planning to fail.