Crypto HNWIs: How to renounce your US citizenship in 2022…
Why do people do it, is it right for you, and what is the process?
During the past few years, an increasing amount of American citizens have been renouncing their US citizenship – and in an overwhelming majority of these cases, the rationale for doing so was tax related.
Apart from Eritrea, a country situated in the Horn of Africa region, the US is the only other country in the world with a citizenship-based tax system. US nationals and green card holders all remain in Uncle Sam’s tax net, whether they’re living in the States or not.
And even if you don’t owe the IRS a dime, you still have to file your US tax returns every year; and best you file them properly.
While Puerto Rico offers excellent tax incentives for US nationals, the only way to get rid of your US tax obligations for good is to renounce your citizenship and give up your US passport.
From the outset, it must be stated that citizenship renunciation is not for everyone; it is a drastic step that must be well thought through, and planned for in consultation with a tax advisor who is familiar with your specific situation and objectives.
Yet despite the gravity of taking the step to renounce, an increasing number of Americans have been choosing to do just that in recent years – and it’s not just expats.
In fact, during 2020 alone, a record 6,700 Americans filed for divorce from Uncle Sam. A large majority of these applicants would cite high taxes as the reason for doing so – but in addition, annual tax reporting is an onerous and stressful task that most expatriated US citizens could do without.
Especially if you’re operating a business outside of the US, the reporting requirements can be overwhelming.
So getting out of the US tax net can be very advantageous, but of course there are downsides. Once you’ve renounced, you’ll be giving up your top-tier travel document, the US passport. You’ll also lose the right to come and go in the country as you please, and you’ll likely have to apply for a visa to visit the US, unless your new home country is part of the US Visa Waiver Program (VWP).
And even higher taxes aren’t just coming, they’re pretty much already here. Given the US government’s rampant social spending, higher income, wealth, estate and gift taxes seem all but inevitable.
Introducing crypto high net worth individuals as a frontier market for alternative citizenship.
By conservative estimates, there were more than 103,000 Bitcoin wallet addresses with a balance of $1 million as of February 2021; an increase of 10X year on year.
And that’s not even counting the altcoin winners. Given that altcoins account for around 40% of all crypto holdings, there should be over 140,000 crypto accounts holding $1 million or more going into 2022.
We’re talking about an entire generation of newly minted crypto millionaires, most of whom are looking at serious unrealized capital gains tax implications given their recent gains.
Fortunately, however, there are a number of progressive jurisdictions that have opted to treat crypto as a currency, rather than a security. Meaning that if you’re a tax resident there, you won’t get hit with capital gains tax if you were to sell your crypto holdings.
Going into 2022, the list of countries taking this stance regarding crypto gains includes Portugal, Germany, Switzerland, Malaysia as well as El Salvador.
But if you’re an American, gaining legal residency in a crypto friendly jurisdiction, on its own, won’t be enough. You’d need to first gain alternative citizenship (and possibly establish legal and tax residency there or elsewhere), and renounce your US citizenship in order to fully terminate your tax relationship with the US.
And if you’re going to renounce, you’ll likely be subject to an exit tax; Uncle Sam’s last bite at your net worth before you embrace greater financial freedom…
If you’re classified as a “covered expatriate”, you’ll likely have to pay an exit tax upon renouncing your US citizenship. As of 2021, you’ll be considered to be a covered expatriate if:
You fail to certify that you have adhered to all US federal tax obligations for the past five years.
You have a personal net worth of $2 million (including your worldwide assets) or more.
You have had to pay an average net US income tax of more than $171,000 for the five-year period prior to your expatriation.
This exit tax is calculated as if you were to sell all your assets on the day before you expatriated, and thus became liable to pay a capital gains tax.
Net capital gains, in 2021, can be taxed at a rate of 23% or slightly higher. However, it’s not all doom and gloom; as of 2021, the first $744,000 of eligible capital gains are treated as tax-free.
Also, if you renounced your US citizenship before your 19th birthday, or if you were born with dual citizenship, you should be able to sever your tax relationship with the US with far greater ease.
Renouncing your US citizenship: the process at a glance
Step 1: Acquire alternative citizenship before renouncing your US citizenship – you do NOT want to become a stateless person.
Step 3: Submit your CLN form during your appointment, along with a “Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of US Citizenship” (Form DS-4081).
Step 4: Surrender your US passport.
Step 5: Wait for approximately 3 to 8 months to receive your stamped CLN form back from the State Department in Washington DC.
Against the backdrop of tax increases discussed above, an increase in the number of American citizens looking to renounce makes sense… yet the US government is not playing ball.
The US government are unwilling to see these wealthy people exiting the tax base, and are consequently dragging their feet when it comes to processing citizenship renunciation applications.
If you’re considering renouncing your US citizenship, it is vital to do so within the confines of the law, and to seek expert tax advice from an advisor who is familiar with your unique situation.
But given the level of uncertainty and tax changes we’ve witnessed in the past two years, it is advisable to take action sooner rather than later – and gaining a second citizenship is one of the first requisite steps.
If you’d like to speak to a citizenship planning expert about your available options for alternative citizenship by investment as a crypto investor, get in touch with us today.
DISCLAIMER: The above article does not constitute tax or investment advice, and is presented purely for general informational purposes. Always be sure to discuss your unique situation with a tax expert that is familiar with your situation before making any decisions about second citizenship or tax matters.
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