Asset Protection and Cryptocurrency.
Now that 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. Protecting this 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.
How Are Transactions Documented for Bitcoin?
It is important to understand that Bitcoin is not a physical currency. Bitcoin is completely digital and as a result, transactions are different than the US Dollar. Instead of having physical currency that has a physical and applied tangible value, Bitcoin is digital, and the value is determined based on the demand applied to it. Where a cash transaction has a known and insured value when entering into a monetary exchange, Bitcoin relies on a digital verification process to make sure that the value requested is the value received.
In order for there to be a Bitcoin purchase or sale, there must be a verified transaction beforehand. The verification is done via the blockchain which verifies a digital signature (a random sequence of numbers and letters) of where the Bitcoin was before the transaction and where it is supposed to go by the end of the transaction. When the transaction begins, there is a public key that shows where the bitcoin has previously been sent and the verification steps that resulted in that transaction. By the time the transaction ends, the recipient of the Bitcoin(s) will receive a private key that allows only the person who sees the key to be able to access and distribute that bitcoin.
Are Transactions Reversible?
As previously mentioned, cryptocurrencies are not the same as physical currency. Once a cryptocurrency transaction begins, it cannot be stopped, slowed down, or returned by either party until it is finished. Because of this, refunds in cryptocurrency are never guaranteed and before a transaction is started it is important to understand what the process for receiving that cryptocurrency back in the form of a refund will be. This would be discussed with the receiving party to understand if the initiating party would receive tangible currency, cryptocurrency, or another form of good deemed of similar value.
Due to the constant change in value of cryptocurrencies, it is important to make sure there are terms agreed upon before a transaction is initiated to reduce potential conflicts that may arise after the transaction is complete. With cryptocurrency not being a physical form of currency, its changing value can be an issue when trying to receive a refund or exchange. As an example, if you were to send an amount of Bitcoin valued at $50.00 U.S. Dollars but requested a refund, the value of the coin you sent could have decreased to $49.75 as a result of its fluctuating value. To mitigate the issues that arise with potential gains or losses in value of a cryptocurrency used in a transaction agreeing upon a set refund allows the initiator and the recipient to maintain equal value in the transaction and any potential refund thereof.
Can Cryptocurrency Be Garnished?
When it comes to cryptocurrency and finances, it is important to understand that any cryptocurrency assets are not considered income. Instead, cryptocurrency is considered property. As property, it limits the ability for the federal government and private persons to be able to place a garnishment upon it. As it is not income and thus is not a guaranteed source for financial stability it cannot become the direct target of a garnishment. However, as property, cryptocurrency assets are not invulnerable and add to a person’s overall net worth, which can result in higher garnishments if such an issue were to arise. Protecting all of one’s assets is vitally imperative to ensure that they cannot become the target of any legal action.
Can Cryptocurrency Be Classified as Property?
It is important to understand what type of assets cryptocurrency is classified as and if they can be claimed as property. For starters, cryptocurrency is considered to be an intangible asset. This means that in regard to the IRS and taxation, they can be recorded at acquisition costs and once an impairment test is performed but cannot be returned due to impairment loss. The IRS stated in 2014 that “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” (Section 4, Answer 1)*. As a result, depending on how the cryptocurrency is held, it could be placed under classification as personal property, investment property, or business property. Meaning, it is up to the user to specify what entity the cryptocurrency is being held as. As an example, if you are using Bitcoin to make sales transactions as a Grocery Store owner, it would be classified under the business property category.
Are Cryptocurrency Assets Safe?
A common reason for people to buy cryptocurrency is the privacy factor that goes into it. Transactions via the blockchain are anonymous in that transactions cannot be traced to a single individual. This does not, however, mean that any cryptocurrency assets do not need to be disclosed. This makes them just as vulnerable to lawsuits and seizure as any other assets a person may have. While this may bring the idea of simply not disclosing these assets, that becomes fraud and removes any and all potential protections they may be afforded. One of the best strategies to protect cryptocurrency assets is through an Asset Protection Trust.
How Is Cryptocurrency Protected?
As a result of being a digital currency, the first step towards protecting cryptocurrency assets is its basic encryption. There are advanced programs and trading platforms that are involved in transmitting and storing the cryptocurrencies data between wallets and exchanges. However, further protections to these assets are not usually immediately applied and require further protection. Having a cold storage key (a device that locks cryptocurrency assets in a secure digital vault) or even placing the asset information in an Asset Protection Trust can help bring peace of mind in that those cryptocurrencies will be secured.
The Best Asset Protection Strategies for Cryptocurrencies.
Because cryptocurrency has now become an asset, it is important to understand the different ways it can be protected. A few of these protections include Offshore Trusts, a Titanium Trust, and Domestic Trusts. These protections can be discussed when drafting an Asset Protection Plan with proper assistance from law firms such as Mile High Estate Planning. It is important to understand the different ways each of these protections work and what the benefits to each protection are.
Offshore protection is an excellent way to gain peace of mind through an added layer of security. Mile High Estate Planning utilizes offshore 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 could be faced. A few of the reasons Mile High Estate Planning utilizes Cook Island Trusts is
- Their 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
- 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.
A second form of asset protection that can add a layer of security to cryptocurrency is a Titanium Trust. The Titanium Trust is Mile High Estate Planning’s proprietary Asset Protection Trust that takes a traditional domestic asset protection trust and offshore trust one step further. Like titanium metal—strong and lightweight—the Titanium Trust has protects your assets in the United States but with the added advantage of agility to move your assets through a network of International Trust Companies, Protectors, and Bankers who work together to safeguard your assets.
One important factor that makes a Titanium Trust so beneficial is that it enables the trust assets to remain in the US. This allows the Trust maker to remain in control of the assets unless a legal threat arises. If any risk presents itself to the assets in the Trust, those assets can be moved to an offshore trustee that can assume management of the Trust. This results in anyone who wants to attack the Trust structure being required to travel to the location where the Trust is held to begin any legal battle they intend to pursue.
Domestic Asset Protection:
Lastly, a Domestic Asset Protection Trust is a method of asset protection that will help limit your exposure to legal risk. A Domestic Asset Protection Trust has a legal structure that allows you to protect your assets from legal threats. Domestic Asset Protection Trusts can provide a legal separation for yourself and designated assets. With this method, the beneficiary can be the same person who created the Trust. This allows you to protect your assets from lawsuits, financial claims, and a host of other potential legal events. However, Domestic Asset Protection Trusts have come under attack and should only be used in limited circumstances.
Cryptocurrency is a volatile and fresh new player in the financial investment market. It could continue to see steady progress and become a mainstream currency. While cryptocurrency is by no means a sure bet, it does have standing that it will be around for the foreseeable future. The above information is only here to provide you with some things to consider when thinking long or even short-term at investing in the cryptocurrency marketplace. Mile High Estate Planning is a law firm, we render legal advice and we do not make any investment recommendations.
One must always do research and speak with a financial advisor before making a financial decision. The intention of this article is to be informative only. If you would like to learn more about estate planning or asset protection for cryptocurrency, contact us today by email at Info@MileHighEstatePlanning.com or by phone at 833-Ask-Blake. We always start with a free initial consultation and if you later decide to hire us, we would be happy to take payment in several different forms of cryptocurrency.
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