Bitcoin Tax Strategies & Corporate Structures: Why Governments Worldwide are Scared of Bitcoin's Incredible Potential
Contributed by WebMastersJury
16 October, 2017
It was not long ago that Bitcoin was the running joke in financial circles. Only a few short years back, Bitcoin was widely considered a joke that had no place in the financial marketplace. Some called it a scam, and some simply didn't understand the freedom that it would give the masses in this digital currency world. While the world was mocking Bitcoin, the cryptocurrency was growing, and today, is creating a small revolution, changing the way global monetary systems are looking at their future.
Governments and regulatory boards are clamoring to make crypto and block chain management plans, and some have even blocked Bitcoin altogether. Saudi Arabia, Bolivia, Kyrgyzstan, Ecuador, Bangladesh and Thailand have all banned Bitcoin. This hasn't stopped its growth and has, if anything, hindered those governments from collecting data on their citizen's use of Bitcoin.
The main issue governments have with Bitcoin is from a tax perspective. Bitcoin is virtually impossible to tax and anonymous to use. According to BitcoinPlay about stats in 2015, only 802 citizens filed taxes on Bitcoin income in the USA. There is no way to verify or audit their submissions.
Furthermore, Bitcoin can be used to store capital outside of the conventional banking system. From an investors point of view, Bitcoin is a potential tool to implement in tax strategies, to lower tax burdens to near zero. As governments loose control of the financial reigns and legislative control they have on money, due to Bitcoin, here are just a few strategies that have them pondering the scary Bitcoin future they can't afford.
Making & Receiving Payments in Bitcoin
By accepting payments in Bitcoin, businesses can avoid paying VAT or sales taxes. Considering that most local and federal taxes are based on a percentage of local currency, Bitcoin is not taxable in terms of value added taxes on certain goods. Finland and Belgium, for example, have exempted Bitcoin from VAT, choosing to treat it more like a commodity. This effectively means that using Bitcoin would be, almost, a form of bartering and thus not taxable.
The implications of this have enormous tax benefits for businesses and investors. Imagine if apple or Samsung were to accept payments only in Bitcoin and channeled all those sales through one of these countries. The result would be open access to the market with zero tax liability.
Many people will say that's impossible, considering Bitcoin is not so heavily used and, thus, couldn't be the sole form of payment accepted. However, many major brands have already begun accepting Bitcoin, including Expedia, Dish Network and Microsoft. Though not widely accepted yet, this is where block chain innovations come into play.
Imagine a payment gateway that automatically transferred your inbound payment from dollars, euros or pounds, straight to Bitcoin. These apps are already in development and will likely hit market by the time this article is published or shortly after. This would save customer costs by no longer having to pay VAT for good or services. Furthermore, it would simplify the current reporting and accounting elements, by removing the need to account for VAT on raw materials and input, as the difference would no longer be the net deduction when calculating the amount of VAT or sales tax an individual or a business owes.
In addition, a product having to include VAT in its pricing would be more expensive to the customer, and thus would likely lose to a product that didn't require the extra percentage. A customer cares more about their final cost and rarely takes into account how much tax is lining the coffers of their governments from a specific sale. In the case of most European countries, that can constitute a savings of up to 15% on the actual cost to the consumer.
Paying Dividends & Bonuses in Bitcoin
Another interesting idea that has been circulating is the issuing of dividends and bonuses to stakeholders or employees with Bitcoin. This would effectively allow the capital gains to be differed, and in the case of a bonus, would not immediately be taxable personal income. That would change, however, if or when those Bitcoins were sold or transferred to Fiat or conventional currencies. In terms of capital gains tax, a Bitcoin is a commodity, so therefore is only eligible once sold for a profit. In the event they are sold at a loss, they would subsequently be a capital loss and could even be used to offset gains in other sectors. A company could choose to pay out dividends in Bitcoin at, say, 1 Bitcoin for every 1000 shares. In this scenario, each share would be receiving a dividend of almost $4 at current Bitcoin prices. These dividends could then be used as Bitcoin or converted to cash, however the later would require reporting. Keeping these gains in Bitcoin would result in a virtually untraceable bonus and one that could be differed offshore or to a later more beneficial tax year or climate.
Paying Staff in Bitcoin
To take the idea of paying out investors or bonuses a step further, what about paying employees in Bitcoin? In essence, if an employee were willing to accept compensation in the form of Bitcoin, they would be bartering their services to the company for a commodity. In terms of the tax implications on a Bitcoin salary, no precedence has been set to date. That being said, if the crypto was to work in theory like a commodity, as some would say, then it would be the equivalent to a person choosing to be paid in gold or oil rather than a fiat currency. This would mean the company would no longer have to withhold any taxes on the employee's behalf for personal income tax. On the employees end they could in affect only report the income of the Bitcoin converted to fiat currency and used in that particular tax year.
The problem is that most employees require the majority of their compensation immediately. However, for a small segment of the top earners, this method of lowering personal income tax burdens can be substantial. In the event these Bitcoin salaries could be invested as Bitcoin or spent as Bitcoin on basic needs like housing or food. The value of this strategy could potentially grow to include a far greater demographic of the workforce.
This particular strategy is well suited for the growing baby boomer segment that is approaching retirement. They are in the twilights of their careers and are likely making more, due to seniority and experience, and likely paying high taxes due to falling in higher tax brackets. With the use of Bitcoin as salary, they could potentially differ a portion of their salaries to their retirement years, similar to company stock or retirement plans. The difference would be they would ultimately have total control on when and how these funds were invested. Also, the ability to liquidate and administer without external interference would be greater, and more placed in the hands of the individual rather than group funds or retirement plans.
Keeping Profits in Bitcoin
With the corporate tax rate in America at nearly 35%, and most western countries hovering above 20%, companies that operate globally have long been using offshore companies as a way to reduce tax on profits. The main issue is that many of these offshore entities are illegal (if proven) and have to be set up and maintained in jurisdictions that may not be the first choice of an investor. These profits can end up sitting in foreign banks, and with the tightening of regulations and money laundering laws, could one day be liable to taxation and back payments. With Bitcoin, a company could leave their money in Bitcoins, avoiding a bank altogether. If the income is never reported and no paper trail of its whereabouts exists, no bank has any evidence of it, and it becomes impossible to tax.
Many companies use offshore banking as part of their corporate structure to do just this, avoid paying large corporate taxes. Apple, Google and other tech giants have been doing it for years. Before them, most fortune 500 companies differed large amounts of their profits to offshore tax havens. The problem is, like in the case of Switzerland, caving to pressure to disclose account information; these tax havens may one-day report activity to the country that is hunting these large corporate cash stockpiles.
Another issue is the potential for a single fiat currency to fluctuate. When you are talking about millions or even billions in foreign accounts even slight fluctuations can result in substantial loss of capital. Bitcoin is not connected to any one currency or any one government or legislative body. Therefore, Bitcoin should be able to avoid major problems like government collapse or changes in tax regulations and exchange rates.
Although keeping corporate profits in Bitcoin is not commercially used as of yet, Bitcoin cannot be ignored, as the potential for large and medium size corporate entities to reduce taxation is huge. Furthermore, with 4-, or even 5-digit-value growth in Bitcoin over the past few years, the potential for return on parked capital is far greater than bank interest rates or long-term bond yields. Therefore, Bitcoin has the unique ability to shelter profits from taxation, diversify and shelter capital from government or legislative changes. Also Bitcoin has the potential to increase the value of capital at a rate far outpacing conventional methods of parking assets offshore for small interest on capital held in foreign accounts.
The latest block chain technology to make headlines is ICO's or "Initial Coin Offers." These, in essence, are the issuing of tokens or coins for a company, in exchange for capital. This means the company can maintain control of the shares of a business while raising capital for a new venture. In terms of taxes, this has the implications of creating an easily tradable coin (security like financial instrument) that leaves no paper trail and is not yet federally regulated. From a corporate point of view, this means capital is easier to get from sources outside of the venture capital markets. Ultimately, it also allows for investors to get in at the inception of emerging technologies. With conventional venture capital markets, large percentages of the stock or corporate shares are traded for capital. In the case of an ICO, capital is traded for a coin that represents a service or promise to convert it to some form of value in the future. China recently banned ICO's and the US securities commission has stated they will treat ICO's as securities. That being said, as most coins are issued for Internet or tech-related companies that are not restricted to a specific region or country, ICO's can be used to garner capital from various offshore locations.
From the point of view of the investor, ICO's allow access to new ideas and investments without meeting the 2 million minimum thresholds on venture capital investment currently in place. This means an investor with small capital input can still invest in potentially high profit industries, much earlier than before, creating better long term returns if the idea takes off.
Putting It All Together
Based on the strategies for tax avoidance and corporate structure outlined in this article, a company or entity could exist completely outside of the legislative umbrella of conventional business and markets, using Bitcoin and Block chain technology. In theory, a company could raise capital from ICO's, sell goods or services in only Bitcoin, and pay employees and shareholders in Bitcoin. Furthermore, corporate profits could be held without a bank account and suppliers could also be compensated using Bitcoin. This would imply a completely tax- and regulation-free corporate structure out of the conventional economy or monetary system. The company, in essence, would not need to issue stock or exchange local fiat currency to operate.
Though this might be the case today, it will not last long. Governments are already looking to find a way to regulate Bitcoin and other cryptocurrencies.
Though these loopholes exist now, regulators will begin to close down these huge tax grey areas. Whether or not they will be able to do it effectively, is yet to be seen.
Due to the nature of Bitcoin it will definitely be a uphill battle for legislators. With Bitcoin empowering the taxpayer and making tax avoidance much easier, it is easy to see why governments are afraid of Bitcoin. Bitcoin currently makes up about 1.5 billion in traded capital, compared to 300-trillion traded conventionally. Though this represents such a small percentage of the market, governments fear the potential of Bitcoin more than anything else. If block chain continues to grow unchecked, the losses to the governments in tax revenue alone will potentially cripple the governments' abilities to operate.
Bitcoin, however, is doing exactly what it was created to do, be a tool that is above regulation, manipulation and theft – ultimately taking power away from crooked bankers and politicians and giving it back to the free markets and capitalists. Governments are smart to fear that revolution, as it might just be their doom.
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