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 for 25 years and how we can use this trust association to maintain the correct accounting and avoid any tax situation. I created a special purpose trust 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 I set up here is irrevocable. It is a trust relationship that is not incorporated and does not derive its existence or function from any statute or legislative enactment. It is simply a business trust organization that is managed for the benefit of one or more beneficiaries and for the purpose of earning profit and gain. By definition, this is a structure that is not merely exempt from taxation, it is immune.
The trust is formed inside of the operating agreement written for a limited liability company (LLC). The LLC is the beneficiary and its members act as the trustor or creator of the trust when they contribute or exchange their fiat currency for a blockchain based asset. The trust is introduced into the operating agreement as a clause that defines a specific class of property to be managed by the LLC and the manner in which it will be managed. The operating agreement must be amended to include the specific terms and include the Blockchain Tax Immunity Trust into the agreement. This has the same force and effect as enacting a law. The trust provision in the LLC becomes the law of the business and creates two layers of protection, one given by the trust relationship and another given by the manner in which a properly written operating agreement provides protection against charging orders (writs of attachment), tax deferment and pass through attributes for property rights.
The trust does not require any tax identification number (EIN, etc.) and does not require any bank account. You continue using your same exchange accounts and with this structure, you open a new bank account for the LLC to act as beneficiary for the trust. You then fund this account to purchase crypto-graphic coins, tokens and other assets, but maintain those assets as a managing member for the beneficiary. You can even move your crypto-graphic holdings from your personal wallet to the beneficiary’s wallet. Any tax reports, such as a 1099, are then made in the name of the beneficiary with its tax number. Because the beneficiary is a tax deferred structure, neither the IRS nor any state look to it for the payment of a tax. And because the intent of the trust is to make a profit from this activity, the trustee is not subject to any tax either. Can you imagine the IRS trying to audit the blockchain? It’s already audited, every moment, in real time. Can you imagine the IRS expecting the blockchain to file a tax return? It’s not subject to any taxes, at the very least, because it is the trustee for an irrevocable business trust organized for the benefit of beneficiaries for the purpose of earning profits and gains. By definition, it’s not taxable. The only situation in which a managing member would cause a taxable event, would be if he reached a consensus with the other managing members under the operating agreement, to disburse fiat currency from the beneficiary to himself, in his personal, individual capacity. Of course this is entirely unnecessary and can easily be avoided.
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 trust clause, and then I will be able to provide you with a completed Blockchain Tax Immunity Trust.
To order your Blockchain Tax Immunity Trust, send an image of your check payment, or check information including the name of the account holder, check number, amount of $275, bank account and routing numbers from the bottom of the check, to my secure email account email@example.com or via Skype to my ID “johnjaysingleton”. The payee is “Georgia Capital, LLC”. Be sure to obtain confirmation from me before sending via Skype so that we know you have the correct one. If you also need a limited liability company because you are not already using one, include an additional $497 plus state fees with the amount in your check. If you don’t know your state fees, just ask via email or Skype.