Could Cryptocurrencies be the Ultimate Tax Haven?

Could Cryptocurrencies be the Ultimate Tax Haven?

More tax on you. That’s the core of the budget this week. They’ll do it via an additional 0.5% on the Medicare levy. They’ll sting you with a $6.2 billion tax on the banks.

It’s a budget trying to get votes. And boy does the current government need those votes. It’s under fire from Labor. It’s suffering in every opinion poll. Heck, Turnbull is even still under threat from Tony Abbott.

It’s quite a shambles of government right now. And somehow, they think more taxes on you will help dig themselves out of this epic hole.

What makes it all worse is that under a Liberal government, you’ll end up being worse off. And if it changes to a Labor government, guess what…?

That’s right — you’ll still be worse off. No matter who’s running the show, you’ll be worse off. That’s through no fault of your own. You didn’t run up half a trillion dollars in debt.

But you’ll pay for it. Now with the new spate of taxes, the effective top marginal tax rate is 49.5%. That’s right. If you happen to be a high-income earner (over $180,000), kiss half of your income goodbye.

No wonder high-income earners try and head offshore to places like Singapore or Dubai.

You only need to look at France’s 75% supertax. Instead of pulling in more revenues from the wealthy, it pushed them out of the country.

All it did was discourage investment and see tremendous capital flight. Completely counterproductive to what they were trying to achieve. Instead, the wealth went offshore.

Infamously, French actor Gerard Depardieu became a Russian citizen and moved to Moscow.

And Australia is on a tax increase spree.

So what can you do to keep some wealth outside of the grubby mitts of government?

Bitcoin to buy things…lots of things

Right now, the government has decided to ‘align the GST treatment of digital currency (such as Bitcoin) with money from 1 July 2017.’

Purchases of digital currency will no longer be subject to GST. Score! What does that mean for cryptocurrency?

Well, it means the only time you’ll get taxed on your digital currency is when you spend it. And you simply pay GST on the goods or services you purchase with it.

If you own bitcoin and use it to buy things, then you only pay GST when you spend it. Bitcoin is money.

Now, as we understand it, that means that if you own bitcoin today and can buy $2,000 worth of goods with it, then you pay GST on the goods you buy. Again, just like money.

Also, let’s hypothetically say that your bitcoin is worth the equivalent of $20,000. And you use your bitcoin to purchase $20,000 worth of goods and services. Well, in that case, you pay GST on the goods you buy. Again, just like money.

Our interpretation is if you own bitcoin today, and its value goes up tomorrow, that’s fine. If you use it as a method of payment, then you will only pay GST when you spend it.

From the very beginning we’ve always said bitcoin — at its core — should be used as a method of payment for goods and services. We’ve always stood by the fact that once you buy bitcoin, you shouldn’t aim to convert it back to fiat currency at any point.

Our view is that if you have it, hold it. We think the long-term purchasing power of that bitcoin will increase over time. Think of it like holding Aussie dollars and that, instead of buying a litre of milk with your $1, in the future you’ll be able to buy 10 years’ worth of milk with that $1. Sounds incredible, really.

Is this really a ‘super’ tax haven?

The core premise, though, is to use it as a unit of exchange in the future. Not as an asset to convert back to fiat money.

In that sense, yes, the government will take its clip — 10% in GST, which you pay for goods and services. But remember, you also don’t have to use bitcoin or even store it in Australia.

You can own and hold a bitcoin wallet in any country you like. That’s the beauty of it. It’s borderless and the government can’t take it from you — as it won’t ever know where you keep it.

Omri Y. Marian, from the University of California, published a paper last year titled ‘Are Cryptocurrencies “Super” Tax Havens?’

In his paper, he points out:

‘…that some evidence suggests that Bitcoin may already be used for tax-evasion purposes. One study found that many owners of Bitcoin wallets use them as “savings accounts.” Such wallets are used only to receive but never to send Bitcoins. Earnings in such wallets, unless voluntarily reported, are beyond the reach of taxing authorities. In addition, researchers have discovered that many Bitcoin users employ “fork and merge” patterns. Large amounts of Bitcoins are split into multiple small accounts, apparently owned by the same user, or large amounts are bought in small batches using multiple wallets. Tax-evaders and money launderers regularly use these tactics to attempt to hide the sources, as well as the destination, of funds. Moreover, some taxpayers have openly acknowledged that they have considered using Bitcoins to avoid tax-reporting requirements.

We certainly don’t advocate any of these measures. But we do make note that these are methods some people currently use. It’s a grey area, and one we don’t think government truly understands.

Again, we stand by our reasoning that bitcoin and cryptocurrency have long-term potential to increase in value. And that the idea is to one day use that cryptocurrency to buy goods and services.

How you choose to go about that is your call. And you should always get the advice of a professional tax agent. Although we think it’s going to be hard to find an accountant with a clue about bitcoin and cryptocurrency…

Ultimately, while the government has little idea about it all, now might be the best time to get your share of it. And as it becomes more widespread and mainstream, you’ll ideally be able to use it to buy more as the purchasing power skyrockets.

Of course, we could be wrong about bitcoin and other cryptocurrency. And in that event, you want to have some other measures in place to protect your wealth.

We think the best preparation you can do is to get your hands on Vern Gowdie’s book, The End of Australia.

All of his protection measures are easy to implement. And as a basic wealth protection strategy, considering his methods is simply the smart thing to do.

Even just taking on board what Vern has to say is worth the minimal outlay for his book. It’s not that you should read it — you must read it. In our view, it contains the kind of information and strategy every Australian should be thinking about.

Regards,

Sam Volkering,
Editor, Money Morning

PS: Fund manager David Tice is known as the wildly successful manager of the Prudent Bear Fund. He sold the fund to Federated Investors just as the 2008 financial crisis was unfolding.

Tice recently told CNBC: ‘“The market has tended to go down about every seven years. It went down in 1987, 1994, 2001 and 2008. During these periods after the declines, it rallies like crazy. But now bad things are about to happen again.”

Vern Gowdie agrees. He shows you how to bunker down and prepare for those ‘bad things’ today. And how you can capitalise on the coming downturn once the dust settles. To find out more, go here.

Sam Volkering

Sam Volkering is Editor for Money Morning and its small-cap, cryptocurrency and technology expert. Find out what he has to say here with all his latest articles.

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