Crypto investors who are not US citizens or residents may not need to worry about US taxation of their crypto. While some forms of crypto are likely outside the scope of US taxation, federal estate or gift taxes may be levied on certain types of cryptocurrencies and decentralized financial products owned by non-US persons. Note that this article does not address applicable US estate taxes.
US Transfer Taxation of Non-US Persons in General
A person who is neither a US citizen nor a resident – that is, a non-US person – is only subject to US estate tax on real estate located in the United States or US situs property. The highest estate tax rate is 40%, and non-US persons are only exempt up to $60,000.
U.S. situs property includes real estate and tangible personal property, such as B. Works of art located in the US and stocks of US companies.
Also includes: a debt obligation of which a US person is the principal obligor, unless the debt is a portfolio debt, or a debt obligation that meets certain requirements to generate tax-free interest; and intangible personal property, written evidence of which is not treated as the property itself if issued by or enforceable against a US person or corporation. The Treasury Regulations do not provide a clear definition of this category of property.
A non-US person is also subject to US gift tax on the gift of US situs property, which includes tangible personal property.
why annoy transfer receipt
Investors who are not US persons sometimes wonder how the federal government would know they owned property in US locations and how estate taxes would be collected on their investments. One answer is that a financial institution holding its property may require a certificate of transfer issued by the IRS to certify that no taxes are due before the property is transferred to the executor or beneficiaries of the investor’s estate. This is because this institution may be liable for any taxes due if it transfers ownership without confirming that the tax due has been paid.
Although obtaining a certificate of transfer has traditionally been a problem when dealing with banks and similar financial institutions, it seems possible that a cryptocurrency exchange or custodian may require a certificate of transfer to demonstrate that no inheritance tax is due when crypto is to be transferred from an account of a deceased person.
Applicability to Crypto
Bitcoin, stablecoins and NFTs
Given the tax rules discussed above, which appear to focus on tangible property and stocks of US companies, cryptocurrencies, NFTs and similar digital assets may not sound like assets that would be subject to US estate or gift taxes if located in the owned by a non-US citizen. Crypto appears to be inherently intangible, and this is the asset class most commonly believed not to be subject to US taxation. However, how a crypto wallet is held and how ownership of the crypto is transferred can affect whether they are subject to US taxation.
For example, to transfer virtual currency like bitcoin, a person could transfer the bitcoin from a Coinbase account to the recipient’s account. This is unlikely to incur US gift taxes as there is no transfer of tangible property. However, consider the case when a person transfers ownership of a wallet. What would the result be if it was a cold wallet in the form of a USB stick or a piece of paper containing the private keys? And then that flash drive or piece of paper is given to a friend while physically in the United States – could that be subject to US gift taxes?
Similarly, consider the situation of a non-US person whose crypto is accessed through cold storage in the US and that person dies. Should the crypto be considered a US situs asset subject to US estate taxes? While one could certainly argue that what is ultimately property is an intangible asset not subject to inheritance tax, the way the value of that asset (the private key) can be accessed can only be through ownership of tangible property (the flash drive or piece of paper) located in the United States. Without this cold wallet, the crypto is inaccessible and has no value.
Therefore, the wallet itself can have significant value. From this perspective, transferring the cold wallet seems no different than gifting or inheriting an artwork located in the United States to a friend, which would be subject to US estate or gift taxes. While it’s not certain that US taxes would be due in these hypotheses, the uncertainty should warn any non-US citizen to keep their keys cool in the US.
If the private keys are kept in hot storage on a US hosted server, does that mean no US estate and gift taxes will apply? Maybe so, since this looks more like the investor owns an intangible asset. However, the fact that there is a connection to the United States and a transfer certificate might be required to transfer the cryptos makes the situation uncomfortable at the very least.
Lending from crypto, yield farming and staking
For estate tax purposes, it is recalled that US situs property includes: debt obligations of which a US person is the principal debtor; and intangible personal property, written evidence of which is not treated as property itself if issued by or enforceable against a US person.
How would these rules apply to crypto lending, staking, and yield farming? These activities may not feel like a traditional loan, but if a person borrows your crypto and you get paid for it, it can be a debt that could be subject to inheritance tax. Depending on the arrangement of the arrangement, the non-US person may also obtain intangible personal property – the right to staking or yield farming – written evidence of which is not treated as property itself and which is enforceable against a US person. There may be no written evidence of the arrangement in the traditional sense, but there may be a property right enforceable against a US person that undesirably resembles a US situs asset.
Ways to minimize taxes
Given the uncertainty, holding crypto via funds with minimal ties to the United States is the safest way to ensure there is no US taxation of the assets.
Another possibility is that the investor owns the assets indirectly, for example through a non-US holding company. In this way, the non-US person may not be treated as owning a US location asset.
This article does not necessarily represent the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
George McCormick is co-chair of Moses & Singer’s Trusts and Estates and Asset Protection practices.
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