Crypto LLC Protection

Crypto Protection Overview

Crypto firms are turning their backs on the U.S. market after the SEC announced its intention to take on Binance and Coinbase in lawsuits over selling unregistered securities. U.S. Senator Cynthia Lumis is working to create a regulatory framework for the U.S. crypto market.
The IRS does not view bitcoin as a currency. As of 2014, the IRS treats bitcoin as property, per IRS Notice 2014-21. Crypto is subject to short and long-term capital gains and or as ordinary income when you are involved in DeFi yield farming or mining. The type of income will impact the taxation of an LLC that is formed.
Traditional exchanges are opened in an individual's name. More exchanges allow for institutional or business accounts that impact the strategy to protect your crypto. Wallets opened with a password, and private keys require a different strategy for protection.
Non-U.S. residents will need to be aware of U.S. taxation requirements and tax treaties that may apply to their country of residence.
Bot traders have additional steps to evaluate when it comes to taxation and protection of their crypto accounts. They likely don't qualify as a trader.
Even though blockchain transactions are anonymous, if you lose a lawsuit, the courts will force you to disclose all relevant information about your property, including crypto.
If you refuse to disclose your crypto, you are committing fraud. This is why it is important to properly protect your crypto first.

U.S. Resident vs. Non-U.S. Resident Crypto Strategy

U.S. Resident
Non-U.S. Resident

If you are a U.S. resident and form an LLC in Wyoming or Nevada to hold crypto, does that mean you need to foreign qualify in your home state?
If you are operating a mining business or qualify as a trader (not easy to do), which state is best now?
What is the tax impact when you use an LLC to protect your crypto?
How does your LLC own your crypto?
What impact does owning DeFi impact your LLC strategy?

Which U.S. crypto exchanges will allow non-U.S. residents to own through an LLC (that are not under investigation)?
Will you be subject to U.S. taxes on your crypto trading? Mining, staking, rewards...?
Will you be protected by the tax treaty with the U.S.? Will you create a hybrid situation with a U.S. LLC?
Which software is recommended to determine my taxes to file a U.S. return and in my home country?
How do you best protect your crypto outside of your local jurisdiction?
How do you set up a separate U.S. bank account for your new U.S. LLC in addition to your crypto holdings?

Crypto Asset Protection Key Points

What you must keep in mind when you properly protect your crypto.

Avoid Fraudulent Transfers

If you are sued and deliberately move your assets out of your name to become insolvent, that is a fraudulent transfer. If you are sued for $2 million and have $5 million in crypto and only protect $3 million, the transfer of the $3 million would not be considered a fraudulent transfer.

U.S. LLC is Offshore to a Non-U.S. Resident

Non-U.S. residents have the extra advantage when they form a U.S. LLC that is "offshore" or out of their current jurisdiction. This is valuable with the current political and financial unrest in many countries worldwide.

Tracking of Your Crypto

Crypto wallets can be traced to crypto exchanges, and crypto exchanges can be subpoenaed to reveal account ownership information.

Crypto LLC Requirements

An LLC can be managed by managers or by members, and the operating agreement must match the taxation type of whether you have a single-member LLC or a multi-member LLC. We recommend LLC formalities similar to a corporation based upon court cases when it comes to piercing the entity veil or reverse piercing.

The multi-state taxation rules are essential for determining which state to register and if foreign qualification is necessary if you registered in a state such as Wyoming or Nevada as a U.S. resident. Non-U.S. residents may pick any state but have other complexities regarding U.S. tax requirements and tax treaties.

Here is a list of general requirements for the signers after forming an LLC. This list will vary slightly from exchange to exchange (if allowed):

Proof of residence documents must contain your name address and be dated less than three months before the date of submission. Most do NOT accept P.O. Box addresses from any country.
Valid documents include, but are not limited to:

Bank statement
Credit card statement
Utility bill (water, electricity, gas, internet, phone)
Payroll statement -or- Official salary document from the employer
Insurance statement
Tax document
Residence certificate

Crypto LLC Strategy

Crypto is not as private as you think, so don't assume you don't own taxes and don't assume your insurance will protect you in all cases if you are sued personally.

Protecting Crypto with an LLC
Crypto LLC Management Structure
Crypto Non-Resident Strategy
Exchanges and Wallets
Best Crypto Entity

Safe vs. Risk Assets

Three key elements come into play if you hold crypto in an LLC as a safe asset. The taxation of the LLC, the management structure, and which state is best. If you are operating a crypto mining business that generates ordinary income, that is a different strategy. The taxation of the LLC will be covered under the “best entity” section.

U.S. residents need to consider if holding crypto can they hold that in an out of state entity such as Wyoming, or will the management of the LLC create nexus in their home state, even for “safe assets” or “investments.”

NCP conducted research with Deloitte on this important subject back in 1998 when looking at a similar strategy with an LLC and investments through a brokerage account. This falls under the multi-state taxation rules.

Manager Managed vs. Member Managed

The management structure is not one to overlook. There is an important difference between a manager-managed LLC vs. a member-managed LLC. This is especially important for crypto holders.

If you are operating a crypto business, perhaps you have created your own coin, protecting the managers and owners of the LLC would be paramount and the state of formation, even with foreign qualification is critical when it comes to properly planning.

Don’t be surprised if you find one approach from your attorney when it comes to protecting your crypto, and what your CPA may say about it. This is why we have interviewed and consulted with both sides to fill in the gaps.

Tax Treaties

Non-residents have much more involved with taxation when opening a U.S. LLC but keep in mind exchanges do have limitations on specific states. For example, Kraken has funding restrictions with Texas entities. Make sure your U.S. LLC has an actual U.S. address and not a PO box in another state you are using for another business.

Crypto Options and Private Keys

There will be exchanges and wallets where you cannot set up the account in the name of an LLC, and you will want to protect the private keys and have them titled to the LLC; NCP can help you with that process.

LLC Taxation Options

An LLC will give you the most options over a corporation. Keep in mind an LLC can be taxed as a partnership, S or C corp, or disregarded entity. Each will have a different operating agreement. The IRS has default rules for a single-member LLC and partnerships. Form 8832 must be filed for the C corp election and form 2553 for the S corp election.

Keep in mind a non-resident will not qualify for an LLC taxed as an S corporation. An LLC taxed as an S corporation also limits investments that may come on board. Most do not have investors, so the limitations of an LLC taxed an S corporation may not be a concern. The type of income will impact your choice of entity. In general, this may not likely be the case in your situation. Most crypto investors will experience short or long-term capital gains and have those gains or losses flow through to their personal tax returns. The best option in most cases will likely be a single-member LLC disregarded or a multiple-member LLC taxed as a partnership.

The key is to understand this LLC is holding safe assets, and what happens if you are sued personally for something unrelated to your LLC? The charging order is very important with LLCs, and there were important court cases in Colorado in 2003 and in Florida in 2010 that you need to be aware of when forming an LLC for protecting your crypto.

A partnership will trigger a separate federal 1065 tax return, but knowing the best strategy is more important in some key states.

If you have a mining business or are involved in DeFi, that triggers substantial ordinary income, you may find that a single-member LLC disregarded may not be your best option due to the profits flowing to schedule C.

Crypto Taxation

In general, as discussed, crypto is taxed as property, and in most cases, you will have short or long-term capital gains or ordinary income. You may have interest income from lending. The key is how do you get your crypto taxes filed?

There are the basics: when you trade crypto for fiat, trade crypto for another crypto, or buy goods and services with crypto, these are all taxable events. The key is organizing all your crypto transactions to get into a position to file your personal tax returns.

Capital gains will show up on form 8949. If you are a bot trader, for example, you may have thousands of transactions that will trigger, in most cases, a need for crypto tax software to import your transaction via an API or CSV file to start the process to determine your taxation results.

The challenge is depending upon the nature of your activity, how long you opened your exchanges or wallets, will determine how many missing transactions you may have or how many transactions you need to recalculate because the tax software coded the transaction as capital gains, when it was ordinary income, for example.

NCP has done expensive interviews with crypto tax experts and created tools, tips, and PDFs as bonuses with our crypto LLCs to help you file your crypto taxes, even if you have several wallets or exchanges in your personal name.

Crypto LLC and Taxation Support

There are two approaches for support. You can form LLC on your own and hope you can find someone to help you with all the crypto parts and pieces, which will not be very cost-effective in the short and long run, or you can work with NCP that can handle all the steps from start to finish and works with crypto tax and U.S. taxation experts.

Our team is well trained with both LLC and crypto taxation and will guide you to our resources and best options to help you out. We work with crypto experts in legal, tax, and estate planning. We also have critical contacts with various exchanges and crypto IRA specialists.

Your next step is to book a strategy call at this link. During the strategy call, our CEO, Scott Letourneau, after better understanding your situation, will provide you with your best strategy options and our resources to help with your crypto taxation requirements.

“That sounds great, isn't my crypto protected in my own name because it is on the blockchain?”

● The information on the blockchain is public. ● Your wallet address vs. private keys. ● Privacy is not a legal strategy.

Private and Public Keys

Privacy and its role in asset protection

Crypto has generated a lot of attention from those who enjoy privacy. Crypto is decentralized, and you can keep your trades private. Yes, your wallet address is public on the blockchain, but the string of numbers and letters can not be used to identify the individual behind the funds.

The IRS is aware of all of this involving crypto. The IRS realized that early crypto investors were hoping the private nature may mean they won’t have to pay taxes or couldn’t be found. This is not the case.

In December 2016, the IRS issued a summons to Coinbase asking for records of over 500,000 customers that had traded crypto over the past few years. The initial stipulation was that Coinbase had to provide user details if a single transaction – deposit or withdrawal larger than $20,000. Now they are being looked at for selling unregistered securities.

The information they had to provide was:

Taxpayer ID number
Name
Birthdate
Address
Transaction logs
Periodic accounts statements

With this information, it’s clear that the IRS would be able to identify who owed them money and even how much in most cases.

More recently, crypto exchanges must issue 1099-K and 1099-B forms. If you have more than $20,000 in proceeds and 200 or more transactions on an exchange, the exchange must submit that information to the IRS.

Starting in the 2020 tax season, on schedule 1, every taxpayer has to answer a crypto-specific question – if during the year you have received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.

In the role of asset protection, privacy is like icing on the cake. You first want to have solid asset protection, meaning an adequately structured LLC, and assign your crypto to the LLC, or open your exchange in the name of the LLC, operate the LLC as a separate legal entity, even if holding safe assets, and you will have a level of protection if you are sued personally. The creditors will be limited to a “charging order.”

If someone is going to bring a lawsuit against you first, they may do an asset search to determine which assets will appear in your name. Again, you can’t go on the blockchain and figure out who did what transactions unless you have someone’s public key.

If you don’t have a lot of assets in your name, including real estate businesses, you may be less likely to become a target. If privacy makes it harder to determine what you have in assets, that is a bonus. But don’t sacrifice privacy for asset protection.

Another advantage is that Nevada is a better pivot point if you plan to move in the next year or two.

Can you be banned from obtaining decentralized crypto?

Separate Wallets vs. Separate LLCs

You have heard the phrase, don’t keep all your eggs in one basket. This is a mantra of asset protection. Don’t put all your assets into one entity. If you have safe assets such as cash, crypto, artwork, those can all be in the same legal entity. If you want another layer of protection, you can set up a separate LLC to own your private keys, but this is not necessary. But when it comes to having separate wallets, which is like having separate bank accounts, that will make more sense. You don’t want to be a victim of a hack or scam. Pay close attention to website names where the website looks identical, but the URL is slightly different. Nexo.io is the legitimate website, but nexoinvest.io is NOT. They are so similar you may not have noticed.

If fraud does occur, spreading assets across multiple wallets is a relatively easy way to reduce the severity of that loss.

Steps to Domestication

The LLC domestication process is not uniform. Each state that permits domestication has its requirements, and the laws of both the original formation state and the law of the new state must be satisfied. Here are the steps.

Crypto Wealth Protection Strategies

Protecting your crypto involved much more than forming an LLC. There are a multiple of strategies listed below that will impact your degree of protection.

Crypto Taxable Events

Crypto Tax Form Overview

When You Don't Own Taxes on Your Crypto

How to Calculate Your Crypto Taxes

How to Report Your Crypto Taxes

How Does the IRS Know About Your Crypto

What Happens if You Don't Report Your Crypto

Why Protect Your Crypto from Liability

Your cryptocurrency is an asset or property most likely owned in your own name. Any assets in your own personal name (or living trust that does not protect assets from liability) are not protected from personal lawsuits.

One of the advantages of crypto is privacy because blockchain transactions can be anonymous. Privacy does help with protecting your assets, but it is not the starting point. Privacy by itself provides no protection, and it makes it more difficult for someone to determine your assets.

If you lose a lawsuit, the courts can force you to disclose all relevant information about the property you own, including crypto. You will not want to commit perjury (lying under oath) because you hope your crypto will not be discovered.

A person convicted of perjury under federal law may face up to five years in prison and fines. The punishment for perjury under state law varies from state to state, but perjury is a felony and carries a possible prison sentence of at least one year, plus fines and probation.

You already know that many exchanges cooperate with the IRS to disclose financial details, and in countries such as the U.S., you must disclose your holdings on your U.S. tax return.

Ready to Protect Your Crypto?

Schedule a Strategy Call

How to Protect Your Crypto in an LLC