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What is cryptocurrency asset protection?
Cryptocurrency has recently become a financial asset that investors are gaining high returns from. Since cryptocurrency continues to increase in value, it is important to protect and understand the ways you can protect these types of digital assets. A few of these protections include offshore trusts, domestic trusts, and a Titanium Trust℠. These protections can be discussed when drafting an asset protection plan with proper assistance from law firms such as Blake Harris Law. It is important to understand the different ways each of these protections work and what the benefits to each protection are.
Why Cryptocurrency Asset Protection is Important
Cryptocurrency on its own provides a degree of asset protection due to its apparently anonymous nature and potential to avoid third party risk if the owner personally holds his coins or tokens in a physical wallet. However, the protection afforded by this apparent privacy is not absolute, far from it. If an owner of cryptocurrency is involved in litigation, a court can require disclosure of all cryptocurrency assets. Failing to honestly disclose assets when requested by a judge can result in a charge of contempt of court, which carries heavy penalties including imprisonment. That means cryptocurrency can be just as exposed as any other personally held assets in the event of litigation.
Asset protection solutions continue to be of great importance in the cryptocurrency space. As people become more interested in this asset class, those with significant cryptocurrency holdings should consider making sure their wealth is protected. Just like traditional financial assets such as cash, bonds, or publicly traded securities, cryptocurrencies can be safeguarded by using asset protection solutions such as offshore limited liability entities and offshore trusts. If a legal claim ever arises, the owner can turn over management authority of his cryptocurrency holdings to a third-party trustee, thus leaving the cryptocurrency effectively out of his hands for legal purposes. When structured effectively this legal solution can provide remarkable asset protection for almost any type of holdings, including many of the most common cryptocurrencies.
Taxes on Cryptocurrencies
While they are generally referred to as digital or virtual currencies, cryptocurrencies are not necessarily treated as “currencies” by tax authorities. If you are a U.S. person for tax purposes, federal law requires you to report cryptocurrency transactions and pay taxes on any realized gains. The IRS treats cryptocurrency as a property, which means transactions usually result in capital gains. Sales or dispositions of cryptocurrency are taxed based on the proceeds minus the cost basis, which is the amount of funds spent to purchase the cryptocurrency, including fees, commissions, and other expenses. Importantly, exchanging one cryptocurrency for another is considered as a taxable transaction by the IRS. One the other hand, those receiving cryptocurrency from mining or staking are generally taxed as ordinary income on any amounts received from these activities. People being paid in cryptocurrency by a client or employer must report the currency’s fair market value in their taxable income.
Enforcing cryptocurrency tax compliance and clamping down on tax evasion in the space continues to be a priority to the IRS. Investors, traders, speculators, and anyone else holding or transacting in cryptocurrencies should keep in mind their tax obligations and pay special attention to conform with the law.
Why do I need legal guidance to protect my cryptocurrency?
The IRS has deemed cryptocurrency a taxable asset, it can be classified as property. As property, this means it can be a target of legal action, resulting in the loss of cryptocurrency assets—which can be in the hundreds of thousands and millions in digital currency. Protecting your crypto assets will become vital in ensuring that if at any point your assets become the target of legal action, it will have extra layers of security and present a greater challenge for any persons or entities who try to seize them
Cryptocurrency Asset Protection Options
Because cryptocurrency has now become a viable financial asset, it is important to understand the different ways it can be protected. A few of these protections include offshore asset protection trusts, domestic asset protection trusts, and a Titanium Trust℠. These protections can be discussed when drafting an Asset Protection Plan with proper assistance from Blake Harris Law.
Offshore Asset Protection Trust
An offshore asset protection trust is an effective tool for protecting assets from future lawsuits and potential creditors. A trust is established under the laws of a foreign country and managed by a professional trustee not subject to the jurisdiction of the settlor’s home country.
A Blake Harris Law, we utilize offshore asset protection trusts through the Cook Islands, a small country in the South Pacific. Placing these assets in a trust not only protects them from creditors, but also protects them from lawsuits that you could face. A few of the reasons Blake Harris Law utilizes Cook Island Trusts is:
- The Cook Islands legal system is based on English common law with legal institutions of a first world nation
- The Cook Islands do not charge taxes on assets held under a trust
- There is a two-year statute of limitations on all creditors that bring an action against you or the trust
- A Cook Islands Trust can protect assets that aren’t located within the islands and you can transact with them electronically
The Cook Islands do not recognize foreign judgments and as such an American claimant will have to file a case of fraudulent transfer in the Cook Islands if they want to receive any assets from the trust.
A Cook Islands Trust is one of the safest offshore asset protection solutions. A key element of an offshore asset protection trust is ensuring that the trust management has no ties or business presence in the U.S. While not regulated by U.S. government bodies, offshore trustee companies are registered and regulated by the governments under which they operate.
Domestic Asset Protection Trust
A domestic asset protection trust (DAPT) is a legal structure that allows you to protect your assets from legal threats. In essence, a DAPT is an irrevocable trust in which the beneficiary can be the same person who created the trust, and the trust’s assets are shielded from that individual’s creditors.
Due to the simplicity and flexibility of a DAPT, it has become an increasingly popular option for asset protection. While business owners have traditionally been able to protect themselves by using limited liability companies or corporate entities, a DAPT allows individuals to protect their personal assets, as well as any business or investment assets. This type of trust can help level the playing field when it comes to personal exposure to creditors and lawsuits.
It is not just traditional creditors that a DAPT can protect you from. DAPTs also provide protection from legal complaints, malpractice claims, and a host of other financially consequential events.
A DAPT can allow you to shield yourself from the implications of lawsuits. Not only will this help you protect your financial health if legal action is brought against you, but it can also help you deter lawsuits from being filed in the first place. A creditor might be less likely to seek money from you if they know you have legal protections in place.
The Titanium Trust℠ is a proprietary asset protection trust, which takes a traditional domestic asset protection trust and offshore trust one step further. Like titanium metal—strong and lightweight—the Titanium Trust℠ has bulletproof strength. It protects your assets in the United States, but it also has the added advantage of agility, allowing you to move your assets through a network of international trust companies, protectors, and bankers who work together to safeguard your assets.
For years we have offered offshore trust solutions that provide the highest levels of legal protection. Our team of attorneys have created an asset protection trust that provides the strongest level of legal protection while avoiding the ongoing costs and compliance requirements of an offshore asset protection trust. The Titanium Trust℠ combines domestic and international elements to provide exceptional flexibility and protection.
To find out how Blake Harris Law can help you with your cryptocurrency asset protection, please call us at 786-559-1209 or contact us here.