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Crypto Offshore Company

Should You Trade Crypto via an Offshore Company?

Learn why some crypto traders and investors trade through corporations rather than their accounts and how an offshore corporation delivers even more benefits.

The term “offshore company” may evoke images of criminals living on remote islands evading taxes. But offshore corporations are often legitimate entities set up by U.S. residents to simplify and reduce their tax burden. They take advantage of favorable tax rules abroad while complying with personal tax obligations in the U.S.

In this article, you’ll learn why some crypto traders and investors trade through corporations rather than their accounts and how offshore corporations can deliver even more benefits.

Individuals vs. Corporations

Many entrepreneurs set up a corporation for their businesses. While independent contractors may use Form 1040 Schedule C, setting up LLCs and corporations separate personal and business assets and liabilities, making raising capital, protecting assets, and optimizing taxes easier. And at a certain income level, the move makes clear financial sense.

Unfortunately, the IRS doesn’t consider most trading a “business activity,” meaning you cannot even deduct expenses on Schedule C. The only exception is if you trade full-time and derive most of your income through day trading. But only a fraction of individual traders meet these criteria, and those that do face a lot of IRS scrutiny.

A better solution is setting up a limited liability company (LLC) or other corporate entity. In addition to less IRS scrutiny, these vehicles open new doors to save on taxes. For example, corporations can deduct salaries and educational expenses while enabling owners to set up retirement accounts and build Social Security and Medicare benefits.

Offshore corporations are simply entities that aren’t domiciled in the United States. Not surprisingly, many offshore corporations exist in places with low or no taxes. That way, U.S. owners can minimize or eliminate local tax liabilities while simplifying their U.S. tax returns with a single profit or loss entry each year.

How They Simplify Crypto Taxes

Crypto traders face intense tax compliance requirements in the United States – especially for frequent traders. For instance, most traders must compute the capital gain or loss for each crypto sale or disposal and report it on Form 8949. This document could be thousands of records long or more for high-frequency traders!

Offshore corporations enable crypto traders to consolidate their U.S. crypto taxes onto a single line. In particular, Subpart F income refers to income earned by a “controlled foreign corporation,” and the gain or loss on the sale of crypto qualifies as such income. You may also need to complete Form 5471 and Form 926 to disclose foreign accounts.

There are two key factors to keep in mind:

  • Offshore corporations only provide a reporting benefit. You will still owe the same amount of tax as you would through a U.S. corporation doing the same activities.
  • Crypto losses will be trapped in your offshore company and cannot offset other sources of income. But when you liquidate the offshore corporation, you can realize the aggregate losses.

Beyond the tax benefits, offshore corporations also enable U.S.-based crypto traders to participate in opportunities off-limits to U.S. citizens. For example, many ICOs don’t allow U.S. citizens to participate for legal reasons, and many exchanges only serve non-U.S. clients. As a result, you could have access to more opportunities.

How to Setup an Offshore Company

Setting up an offshore corporation can be a massive undertaking, especially if you don’t speak the language or know people you can trust in a foreign country. And, of course, you’ll also need in-country experts to handle your accounting and U.S.-based experts to ensure you accurately report your Subpart F income on your U.S. tax return.

Setting up an offshore corporation involves a few steps:

  1. Choose an offshore jurisdiction for your corporation. For example, the Seychelles, Cayman Islands, and British Virgin Islands are all popular options for crypto businesses.
  2. Submit the registration fee, business plan, and other documentation necessary to create the corporation. For instance, you may need a copy of your passport and proof of a physical address.
  3. Open a bank account, set up crypto accounts, and establish other necessary relationships.

On an ongoing basis, you’ll also need to be familiar with reporting requirements and other obligations. Again, it usually helps to have a local business handle any communication and address reporting requirements. That way, you can focus on crypto trading activities rather than the day-to-day of managing the offshore corporation.

Generally, it’s a good idea to hire a professional or firm to set up and maintain an offshore corporation to ensure compliance. In addition, you should speak with a CPA or other tax professional to ensure that you can realize the most benefits.

Alternatives to Consider

Crypto tax software provides another way to simplify your crypto taxes without the hassle of setting up an offshore corporation.

ZenLedger aggregates transactions across wallets and exchanges, computes your capital gains and losses, and generates the tax forms you need yearly. In addition to avoiding the need to list every sale or disposal transaction, the platform offers visibility into your entire portfolio and identifies ways to save through tax loss harvesting.

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ZenLedger makes it easy to import transactions across exchanges and auto-generate the tax forms you need – even with thousands of transactions! Source: ZenLedger

Another benefit of using ZenLedger is seeing your entire transaction history in a single, easy-to-read spreadsheet. That way, you can easily defend yourself during an IRS audit with a robust paper trail. And you can provide your accountant with a detailed list of transactions to complete your taxes if you don’t use the TurboTax integration or auto-forms.

Get started for free today!

The Bottom Line

Offshore corporations may be attractive for crypto traders looking to simplify their tax reporting. While you won’t necessarily save money on crypto taxes, you can dramatically reduce your paperwork. But, of course, the trade-off is that there’s a high setup cost and ongoing costs to maintaining a foreign corporation.

If you’re looking for an easier way to simplify crypto tax reporting, ZenLedger can help automatically generate the lengthy Form 8949 and other tax forms you need each year. That way, you don’t have to worry about spending hours preparing your taxes or paying accountants thousands of dollars to compile CSV files.

Get started today for free!

Justin Kuepper