Russian company helps Americans to legally evade taxes on bitcoins

Russian expatriate Katie Ananina has been helping people evade taxes on bitcoin profits for the past three years. Writes about it CNBC.

Photo: Shutterstock

As the name suggests, Plan B Passport offers wealthy cryptocurrency customers a path to second citizenship in seven mostly tropical, tax-free countries. Residents of each of them are exempt from capital gains tax on crypto holdings.

“I was smart enough to figure out that $200 in Bitcoin would be worth $100 at some point,” Ananina said. “I don’t think the government should have 000% of it.”

History

Ananina is not a “stereotypical Bitcoin maximalist,” a phrase used to describe people who believe that Bitcoin, and not necessarily other cryptocurrencies, is the future of finance.

Born and raised in Chelyabinsk, a city in central Russia, the former professional yachtswoman moved to the States in 2016 after receiving a green card due to her status as one of the best sailors in the world.

For Ananina, the potential of bitcoins became apparent when she saw the Russian currency plummet by 50% in the two months she lived in Spain during the competition for the Russian national sailing team in early 2015.

“My macroeconomics professor couldn’t explain it to me. “I didn’t have a chance to find out what happened,” she said. “I realized that I wasn’t happy with the way money worked.”

This is how Ananina's days as a "preacher" of bitcoins began.

But, according to Ananina, being one is not just about believing in one currency. She truly believes in jurisdictional arbitration, which for her means leaving behind any government rules governing her actions and finances and going to whatever place suits her best at the time.

“If the government starts influencing me, I will take all my assets and go somewhere else,” she said.

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It's the mindset that prompted the 26-year-old entrepreneur to start her own company to help others do just that. Ananina says several bitcoiners she knows who have held cryptocurrency for more than one boom and bust cycle are thinking of getting a second passport as a way to avoid paying capital gains tax on their assets.

How it works

Each year, Plan B Passport helps hundreds of people from countries like the US, UK, Australia and Canada obtain a second passport in one of seven countries: Saint Kitts and Nevis, Antigua and Barbuda, Dominica, Vanuatu, Grenada, Saint Lucia and Portugal. The company works in tandem with each government's residency or citizenship by investment programs.

“This is an attractive way to attract foreign investment, especially in countries with limited natural resources,” said Ernest Marais, an attorney with the global tax law firm Andersen.

Marais, who has significant experience advising clients on cross-border tax structuring, said this type of passport-buying arrangement is typically found in tax havens - or in places sometimes called "international financial centres".

“In Saint Lucia, you can get citizenship by investing $100 in donations, $250 in government bonds or $300 in real estate,” Marais continued.

Ananina says the average check for her clients ranges from $ 130 to $ 000.

“This is essentially a donation to the country's sustainable growth fund,” she said. “So clients make a donation of $100 or $000, plus some due diligence fees, government fees, and then $150 towards my legal fees.”

Usually families choose Saint Kitts, while Saint Lucia is the most popular program for individual applicants as it is one of the cheapest destinations and has a fairly fast turnaround time.

According to Ananina, business has never been better.

“My only marketing channel is Twitter,” she said. “I literally don’t spend a penny, but I have consultations scheduled three weeks in advance.”

Renunciation of US Citizenship

In the United States, the Internal Revenue Service (IRS) treats virtual currency, which includes bitcoins, as well as other cryptocurrencies, as property. This means that Bitcoin is taxed in the same way as stocks or real estate.

“At a basic level, when a taxpayer sells or exchanges bitcoin, it is a taxable transaction,” explained John Feldhammer, a partner at the law firm Baker Botts and a former senior IRS attorney.

Let's say a taxpayer buys one bitcoin for $ 10 and sells it for $ 000. That person faces a capital gains tax of $ 50. A second passport doesn't automatically solve their tax problems.

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“If a taxpayer has a green card, is a U.S. citizen, or is a U.S. resident alien, the taxpayer must pay U.S. tax on any cryptocurrency they receive, regardless of where the cryptocurrency or the taxpayer is located,” Feldhammer explained. “It also doesn’t matter whether they have dual citizenship; if they are US citizens, they must pay US tax on their income.”

This is why Ananina says many of her American clients are either planning to renounce US citizenship or are considering that option for later.

One Plan B Passport client, who spoke on condition of anonymity, said he had traveled in Southeast and Central Asia for the past ten years and was seriously considering giving up his US passport when he officially becomes a St. Kitts citizen. He said the $ 180 value paid off completely as it is only 000% of his net worth, and capital gains taxes on his crypto holdings will be in the millions.

This person chose the "main" Caribbean passport as he describes it, as it is the oldest and most respected of the programs offering the maximum visa-free travel.

But he warns those who want to apply to prepare for a months-long process with a lot of paperwork, including police checks and medical examinations.

Expatriates should also note that the United States charges citizens a fee to renounce citizenship.

“When American taxpayers emigrate, they are typically subject to an “exit tax,” which is essentially a tax equal to the tax the taxpayer would have to pay if he sold all his property the day before renouncing his citizenship,” says Feldhammer.

Technically legal

Unlike tax fraud, when a person deliberately hides his income, underpayment of taxes on foreign assets is perfectly legal, even if most of the population considers it unfair.

But Marais points out that the IRS and tax authorities are stepping up their efforts to track digital currency holdings through some centralized crypto exchanges.

Feldhammer was with the IRS as a legal advisor when he made significant advances in taxing US taxpayers who deliberately hid assets overseas in order to avoid paying US taxes.

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“Thanks to a combination of whistleblowers, changes in laws and significant international pressure, it is now extremely difficult for a U.S. resident to hide assets abroad,” Feldhammer said. “The US could do the same for cryptocurrency and is already considering changing its laws.”

The US Treasury Department has offered comprehensive reporting on cryptocurrency, which makes spending cryptocurrency as difficult as spending cash without reporting.

The IRS is also stepping up efforts domestically to track down U.S. taxpayers who do not pay cryptocurrency tax. This is done with a tool that allows the government to obtain information on a large group of unidentified taxpayers. The authorities are sending inquiries to various cryptocurrency exchanges as a way to find people who have conducted at least $ 20 in cryptocurrency transactions from 000 to 2016.

Sending such subpoenas is a clumsy way to catch U.S. taxpayers, but it can be effective, Feldhammer said.

This is why many exchanges avoid Americans altogether. Marais reports that Valr, the second largest cryptocurrency exchange in South Africa, does not partner with US citizens.

Although Ananina does not break the law, she gets it from the law enforcement agencies.

“Every time I cross the border, I am detained at the airport for three hours,” says Ananina. “They ask me a lot of questions, and every baggage goes through the craziest checks. They literally turn my socks inside out."

But she says the border guards cannot detain her.

“If I cross the border on foot, it's a lot easier, so I literally started flying to Tijuana and walking across the border to San Diego,” she said. “It’s a much faster route.”

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