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Can you avoid paying taxes on the Bitcoins you've sold by using a shell company outside of the U.S. and transferring the coins to it before selling? I am wondering if there's a legal flaw in the system that allows you to sell bitcoins through a shell company to avoid paying taxes or to lower the amount of taxes paid on any profit made.

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  • The core part of the analysis involves a somewhat obscure part of U.S. international taxation pertaining to Controlled Foreign Corporations. But it is more involved that I have the patience and space to spell out in an answer at this time.
    – ohwilleke
    Commented Jul 19, 2021 at 18:49

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Suppose you could. Now the proceeds of the sale belong to the shell company. What good does that do you?

If you want to use the money to buy stuff for yourself, the shell company has to pay it back to you as a dividend or salary or something, and that payment will be taxable income to you personally.

This might even come out worse for you: if you had held the bitcoins for more than a year, and sold them yourself, you could benefit from the lower long-term capital gains tax rate. But if you collect the funds as salary or dividend, you pay the higher ordinary income tax rate.

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  • So if I buy stocks with bitcoin, does it count as currency or as a swap? I will admit I don’t know much about cryptocurrency, but I thought “selling” it was more like forex which might have different tax implications? There are places that accept bitcoin directly as payment, so the capital gains bit doesn’t seem quite right.
    – ColleenV
    Commented Jul 19, 2021 at 18:17
  • @ColleenV the government does not recognize crypto as a valid foreign currency. Therefore it's treated like a stock. Besides, stocks are not denominated in crypto, so a dollar conversion must be done in any case. Buying AAPL with crypto is the same as buying AAPL with MSFT. Commented Jul 19, 2021 at 18:32
  • @Harper-ReinstateMonica Thanks, so if I wanted to swap my y shares of AAPL for x amount of bitcoin, the bitcoin would be (in general) valued in my local currency for tax calculations? Is it similar to swapping my chicken coop for my neighbor’s trailer but with more documentation of actual value or does the nature of the financial instruments add more complexity? I realize this is complex; I’m just asking for a very general idea and not a guided safari into the wilds of cryptocurrency.
    – ColleenV
    Commented Jul 19, 2021 at 18:49
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    @ColleenV: Most kinds of swaps and barter are treated as if you sold the old property for its fair market value in cash (incurring capital gains tax), then bought the new property with that cash (thus establishing your basis in the new property). So in that broad sense there is not really a difference between trailers and chicken coops. There are some exceptions if the old and new property are substantially identical, but that's not relevant here. Commented Jul 19, 2021 at 18:54
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    @ColleenV In all these discussions, "cryptocurrency" is a red herring. I realize there is a mad social craze right now about crypto, but that doesn't change anything about its tax status. Which is akin to a stock for tax purposes. But that would even be true for currency, if you bought EUR at 50 cents/EUR back in 2014, and bought a $6 coffee in an Albequerque NM Starbucks for €5, you need to report that $2.50->$6 capital gain. Commented Jul 19, 2021 at 18:59
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You can transfer the Bitcoin to a company, but then your shell company (i.e., you) owes taxes on the value of that transaction. You might be able to set up a shell company in a tax haven with no or de minimis taxes on such transactions, but doing so effectively puts an IRS target on your back.

There's undoubtedly some other (more complicated) way to do it legally, but it will require the help of a tax lawyer who is going to cost you more than you save in taxes.

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    This being Law.SE, what does "puts an IRS target on your back" actually mean? Sure, it might increase the chances of an audit, but unless something about the transaction is actually illegal, or taxable in some way you haven't described, the audit theoretically shouldn't result in any penalty or liability. Commented Jul 19, 2021 at 18:07
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IRS has all those loopholes patched.

if there's a legal flaw in the system that allows you to sell bitcoins through a shell company to avoid paying taxes or to lower the amount of taxes paid on any profit made.

No.

The IRS spends a lot of lawyer time identifying and patching these holes. I once read a wonderful quote from a judge, who said roughly "Tax law is elaborate because the methods employed by tax evaders are elaborate".

This indicates a long, long "arms race" between the IRS and tax evaders. A novice trying to enter that field will simply repeat early mistakes made by previous traders.

The pros are working the cutting edge of that arms race. They are also using CPA's to be a "prosecution shield" -- they are not making those tax decisions alone, they are relying on the advice of professionals. When you rely on the advice of professionals, you cannot face criminal prosecution or even penalties - just the tax owed and interest.

Not gonna work, though. Your contribution is taxable the day you contribute it.

Because your company is being formed to hold investment assets. (IRC 721(b)). Your contribution of the crypto-"currency" to the company is considered a sale event, and you must treat it as a capital gain for tax purposes.

Gory details here.

The fact is, you had the asset, and then, it "went away" on a particular date. IRS wants the capital gains tax - they won't care where it went, unless you can show its disappearance is to a destination that is tax-exempt for you -- such as a contribution to a non-investment company you own, or to a charity*.

Since IRS wouldn't care if the company was on Mars, it doesn't help your taxes to use a foreign company.


* Charities are the best deal ever: you never have a tax bill (the charity pays the capital gains, at their somewhat lower capital-gains rate of 0%), and you get to deduct the appreciated amount as a charitable contribution if you held the asset >1 year.

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