Digital asset businesses and investors are quickly recognizing that the legal and regulatory framework of the United States is highly burdensome for their business activities. The various rules can result in added legal and accounting costs related to filings with the Securities & Exchange Commission, compliance with the Bank Secrecy Act, and understanding and complying with the patchwork of money transmitter laws and state tax nexus laws in 50 different states. These issues are further compounded because cryptocurrency transactions such as liquidity pools, non-fungible tokens, and stablecoins often fall into legal and tax gray areas; most laws were written well before the advent of digital assets.

Cryptocurrencies and digital assets are purely electronic in nature, existing only as line items on a blockchain. Because of this, they offer unprecedented flexibility for investors, token issuers, and non-fungible token creators to consider an international business structure for accounting, tax, and legal purposes. The following are some examples of how different international locations and structures can benefit a digital asset business or individual.

Foreign Private Foundations

Many entities are creating digital assets that will be owned by Panama Private Interest Foundations.  Generally, these foundations cannot engage in any business activity that is commercial in nature, but they can own investments. These foundations take on their own separate legal identity and are not considered to be owned by the founder or donor. 

Although this creates asset protection for the founders and their heirs, the foundations also benefit from very favorable tax treatment, such as exemption from Panamanian taxes on any income derived outside of Panama. This structure may, however, create pitfalls for citizens and residents of the United States. The United States has strict disclosure requirements that must be met, and the characterization of the foundation for U.S. tax purposes may subject the income to federal taxation. 

The Master-Feeder Structure

A master-feeder structure is an arrangement whereby a fund establishes several interconnected entities to maximize the tax and legal benefits to both U.S. and overseas investors. This is typically done by establishing two “feeder fund” entities. One feeder fund is generally established as a partnership in the United States for U.S. investors. A second feeder fund, generally incorporated in the Cayman Islands, is established as a C corporation for foreign investors. The two feeder funds will then invest in a “master fund,” typically in the form of a Cayman Islands limited partnership; all fund investments are managed at that master fund level. This configuration is demonstrated in the following chart:

Portugal (and other crypto-friendly countries)

The U.S. Internal Revenue Service has stated that it treats digital assets as property. This generally means capital gains treatment on profits. Portugal, however, is electing to treat digital assets as currency. This means that profits from the purchase and sale of cryptocurrency (or crypto-for-crypto exchanges) are not taxable. Additionally, because of the Securities and Exchange Commission regulations, many initial coin offerings are refusing to sell to U.S. persons. As a workaround, many U.S. investors are taking advantage of the Portugal Golden Visa Program, which offers Portuguese residency by way of investment activity if certain requirements are met.

Other countries are also passing laws favorable to digital asset investors and entities. El Salvador passed a law making Bitcoin legal tender, which creates tax-free gains for individuals paying taxes there. Bermuda created the Digital Asset Business Act of 2018, which outlines that there are no income taxes or capital gains for certain types of digital asset entities and transactions. Both countries are offering investment visas as well to lure wealthy crypto owners to their country. 

Conclusion

It is important to note that the above international tax options are highly complex when U.S. investors become involved, and full details of the benefits and pitfalls of each structure are well beyond the scope of this article. It is highly important for digital asset businesses and investors to obtain effective and accurate legal, accounting, and tax advice from professionals when starting a new venture, or when considering these types of investment options. If you have any questions, please reach out to your financial advisor.

Mark DiMichael, CPA, CFE, is the founder and leader of Citrin Cooperman’s digital asset practice, and a partner in the forensic, litigation, and valuation services department. He is also a certified cryptocurrency forensic investigator, certified in financial forensics, and accredited in business valuation. His clients include mining companies, investors, investment funds, ICO/IEO token issuers, NFT marketplaces/promoters/artists, and financial services companies.