Crypto investors who are not US citizens or residents may not be worried about the US taxation of their crypto. However, while some forms of crypto are likely outside the scope of US taxation, federal estate or gift tax may apply to certain types of cryptocurrencies and decentralized finance products owned by non-US persons. Note that this article does not discuss US state estate taxes that may apply.
US Transfer Taxation of Non-US Persons Generally
A person who is neither a US citizen nor resident—a non-US person—is only subject to US estate tax on property situated within the United States, or US situs property. The highest rate of estate tax is 40%, and non-US persons only have an exemption of up to $60,000.
US situs property includes real estate and tangible personal property, such as artwork, located in the US, as well as shares of stock of US corporations.
It also includes: a debt obligation the primary obligor of which is a US person unless the debt is portfolio debt, or a debt obligation that meets certain requirements to generate tax-free interest; and intangible personal property the written evidence of which is not treated as being the property itself, if it is issued by or enforceable against a US resident or corporation. The Treasury Regulations do not provide a clear definition of what is this category of property.
A non-US person is also subject to US gift tax on the gift of US situs property, which includes tangible personal property.
Why Worry? Transfer Certificate
Non-US person investors sometimes question how the federal government would know they own US situs property and how estate tax would be imposed on their investments. One answer is that a financial institution that holds their property may require a transfer certificate to be issued by the IRS to confirm no tax is due before releasing the property to the executor or beneficiaries of the investor’s estate. That is because that institution may be liable for any tax due if they transfer the property without confirming the tax owed is paid.
Though traditionally obtaining a transfer certificate was a concern when dealing with banks and similar financial institutions, it seems possible that a cryptocurrency exchange or custodian may require a transfer certificate to show no estate tax is due if crypto is to be transferred from an account of a deceased person.
Applicability to Crypto
Bitcoin, Stablecoins, and NFTs
Bearing in mind the tax rules discussed above that seem focused on tangible property and stock of US corporations, cryptocurrencies, NFTs, and similar digital assets may not sound like assets that would be subject to US estate or gift tax when owned by a non-US person. Crypto seems inherently intangible, and that is the asset class most commonly believed to not be subject to US taxation. However, the way in which a crypto wallet is held, and the manner in which ownership of the crypto is transferred, may affect whether they are subject to US taxation.
To transfer a virtual currency like bitcoin, a person might transfer the bitcoin from, for example, a Coinbase account to the recipient’s account. That likely does not incur US gift tax because there is no transfer of tangible property. However, imagine the case of a person transferring ownership of a wallet. What would be the outcome if it is a cold wallet in the form of a USB flash drive or piece of paper that holds the private keys? And then, that flash drive or piece of paper is handed off to a friend while physically present in the United States—could that incur US gift tax?
Similarly, consider the situation of a non-US person whose crypto is accessed via cold storage located in the US and that person dies. Should the crypto be considered a US situs asset subject to US estate tax? While one could certainly argue that what is ultimately owned is an intangible asset not subject to estate tax, the manner in which to access or unlock the value of that asset (the private key) may be accessed only through possession of tangible property (the flash drive or piece of paper) located in the United States. Without that cold wallet, the crypto is inaccessible and has no value.
Therefore, the wallet itself may have significant value. Viewed from that perspective, the transfer of the cold wallet seems no different than gifting or bequeathing a friend a piece of artwork located in the United States, which would incur US estate or gift tax. Though it is not certain that US tax would be due in these hypotheticals, the uncertainty should give any non-US person caution about having their keys held in cold storage in the US.
If the private keys are held in hot storage on a server maintained in the United States, does that mean US estate and gift tax are inapplicable? Perhaps yes, as that appears more like the investor owns an intangible asset. Yet, the fact that there is a connection to the United States, and that a transfer certificate could be required to transfer the crypto, does make the situation inconvenient at the least.
Loans of Crypto, Yield Farming, and Staking
For estate tax purposes, recall that US situs property includes: debt obligation, the primary obligor of which is a US person; and intangible personal property, the written evidence of which is not treated as being the property itself, if it is issued by or enforceable against a US person.
How would these rules apply to crypto loans, staking, and yield farming? Those activities may not feel like a traditional loan, but if a person borrows your crypto and you get paid for that, that may be a debt that could be subject to estate tax. Depending on how the arrangement is designed, the non-US person may also receive intangible personal property—the right to the award from staking or yield farming—the written evidence of which is not treated as the property itself and which is enforceable against a US person. There may be no written evidence of the arrangement in the traditional sense, but there may be a property right enforceable against a US person which may be undesirably close to a US situs asset.
Ways to Minimize Tax
Given the uncertainty, holding crypto through means with minimal ties to the United States is the safest way to ensure there is no US taxation of the assets.
Another option is for the investor to indirectly own the assets, such as through a non-US holding company. That way, the non-US person may not be treated as owning a US situs asset.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
George McCormick is co-chair of Moses & Singer’s Trusts and Estates and Asset Protection practice groups.
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