Now that Bitcoin is gaining a lot of value, people are looking to convert small portions back to fiat currency. Unfortunately, there are quite a few regions where this conversion is subject to capital gains tax. There are some ways to avoid this problem, although not all of them are equally appealing. These methods are legal, though, but it is always best to do your own research first.
DISCLAIMER: We at The Merkle always encourage users to pay their taxes diligently. The methods listed above should be used to optimize your spendings. Blatantly avoiding paying capital gains taxes can be seen as a criminal offense regardless of using the methods below.
Although this is a somewhat of a “dirty trick”, it is possible to gift Bitcoin to others without them paying capital gains tax. Because the bitcoins were never converted to fiat, the capital gain was never realized. This allows you to send a certain amount of Bitcoins without either person having to pay taxes on it.
This will work if everyone lives in the United States, although your mileage may vary for other countries. Bitcoin gifts in the United States are subject to 0% capital gains taxes. That is, assuming the people receiving the coins qualify as “low-income”.
Furthermore, if the person you gift the bitcoins to decides to cash them out at a later time, and also happened to make some profit off of holding them, the person is responsible for paying capital gains on those gifted Bitcoins.
This method may not necessarily be popular, since it requires a fair amount of trust and paperwork to cover all angles. It is not advised to use this method for large amounts of Bitcoin either. Although this is a legal method, it should not be abused by any means.
People active in the world of finance often use bank accounts in different countries. Regions such as Belgium, Belize, and even Hong Kong do not have any capital gains for Bitcoin as of right now. Opening a bank account in that country and using it for Bitcoin exchange purposes is within the confines of the law. However, this activity will still be scrutinized by the government, and may result in an investigation regarding the origins of said funds.
There are also laws regarding owning a foreign bank account which should be taken into account if you decide to go this route.
The best option – although also the ones that will make up most of the time – is just to hold onto Bitcoin and wait until your country officially recognizes it as a currency. Capital gains on purchases or conversion are quite annoying. However, Japan has set a legal precedent to legally remove capital gains taxes from Bitcoin purchases. It will be quite some time until the rest of the world catches up with these developments, though.
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