Tax law for cryptocurrency capital flow in Europe and the USA

Tax law for cryptocurrency: for non-domestic LLCs in the USA

We are looking at a European company that has built up capital by investing in share trading and the like. The capital is held in the European business account and is used to purchase cryptocurrency. A US non-domestic LLC trades cryptocurrency on a decentralized exchange. We examine both cases and determine which taxes must be paid on which side when a transaction takes place between the companies. This also concerns the tax law for Cryptocurrency and cash flow.

Question:
If a US companies without a physical domicile in the USA (Non-Domestic or Exempt LLC) that creates a cryptocurrency on a decentralized exchange and makes large profits is taxable in the US?

Answer:
The tax liability depends on various factors:

• Pass-through taxation: One Non-Domestic LLC with a foreign owner is treated as a "disregarded entity". The income is attributed directly to the owner.
• Income from US sources: These are generally subject to US taxation.
• Income from non-US sources: These are generally not included in the USA taxable as long as they are not associated with a US business activity.
• Decentralized crypto exchange: Income from this could be considered a non-US source (Decentralized crypto exchange has none Clear geographical source, as they take place in decentralized networks), which is still a tax grey area.

Income from a decentralized crypto exchange may not be subject to U.S. taxation, provided it is not connected with a U.S. trade or business. However, the final assessment depends on the specific circumstances.

Supplement: IRS guidelines on cryptocurrencies

• The IRS considers cryptocurrencies to be property for tax purposes.
• Transactions with cryptocurrencies must be reported in US dollars.
• The IRS has issued specific guidelines for the taxation of mining, hard forks and airdrops.

Specific scenario: sale of cryptocurrency to European buyers

Question:
Would the LLC's profits from the sale of cryptocurrency on a decentralized exchange to a European buyer be considered U.S. source income?

Answer:
No, the gains would not be considered income from U.S. sources in this scenario. Here is the reasoning:

• The LLC is in Wyoming or Nevada as a non-domestic corporation, which means that it is not considered a U.S. domestic corporation for tax purposes.
• The transaction takes place on a decentralized exchange, which typically has no fixed location and operates globally.
• The buyer is a European citizen, so the sale is to a non-US person.
• Cryptocurrency transactions generally have no clear geographical source as they take place in decentralized networks.
• The IRS has not provided clear guidance on the withholding rules for cryptocurrency transactions, particularly those conducted by foreign entities on decentralized exchanges.

Given these factors, the income from the sale of cryptocurrency in this scenario would be considered foreign income and not U.S. source income. This is because there is no clear connection to U.S. territory or U.S. persons in the transaction.

Taxation on the purchase of cryptocurrencies by European companies

Question:
Does a European company have to pay taxes when buying large amounts of cryptocurrency with capital from investments?

Answer:
The pure purchase of cryptocurrencies is not taxable in most cases. However, there are important aspects to consider:

• No direct tax event: The mere purchase of cryptocurrencies does not normally trigger a tax liability.
• National differences: The tax treatment may vary depending on the European country.
• Accounting obligations: The company must record the purchase in its accounts and document the value at the time of purchase.
• Subsequent taxation: When selling or exchanging cryptocurrencies, profits may be taxed differently depending on the country.
• Legal uncertainties: The tax treatment of cryptocurrencies has not yet been conclusively clarified in many countries.

Supplement: MiCA Regulation in the EU

• Uniform legal framework: The EU's Markets in Crypto-Assets (MiCA) Regulation creates a uniform legal framework for cryptocurrencies and related services.
• Effects: MiCA could have an impact on the tax treatment of cryptocurrencies in the EU, particularly with regard to transparency and reporting obligations.

Tax law for cryptocurrency - International tax treaties

Many existing double taxation agreements do not explicitly take cryptocurrencies into account. Efforts are being made to adapt international tax treaties to the realities of the crypto market. The OECD is working on guidelines for the tax treatment of cryptocurrencies in an international context.

Challenges in the valuation of cryptocurrencies

The high volatility of cryptocurrencies makes tax valuation difficult. Different valuation methods (FIFO, LIFO, average cost method) can lead to different tax results. Some countries have issued specific guidelines for the valuation of cryptocurrencies.

Conclusion

The tax law for cryptocurrency and related activities is a complex issue that is being discussed both in Europe and in the USA still many unanswered questions raises. However, it can now be clearly seen that trading cryptocurrency does not result in any tax obligations for either party in the scenario with a European buyer and a US LLC company owned by a non-US citizen. Companies and investors should take advantage of this important information.

The rapid development of the crypto market and the associated regulatory adjustments require continuous monitoring of the legal framework. Given the increasing importance of cryptocurrencies in the global economy, it is likely that we will see further clarifications and possibly harmonized approaches to taxation in the coming years. Until then, it remains crucial for companies and investors to adapt to the specific legal situation and keep up to date in their respective jurisdictions.

Quick FAQs

How does the IRS treat cryptocurrencies? The IRS considers cryptocurrencies to be property and requires transactions to be reported in US dollars.

Is income from decentralized crypto exchanges taxable in the US? Income from decentralized crypto exchanges could be considered a non-U.S. source, especially if the purchaser is not a U.S. citizen.

How does the MiCA Regulation affect the taxation of cryptocurrencies in the EU? The MiCA Regulation creates a uniform legal framework and could influence transparency and reporting obligations.

Does a European company have to pay taxes on the purchase of cryptocurrencies? The purchase of cryptocurrencies is not taxable, but accounting obligations and national differences must be taken into account.

What are the challenges in valuing cryptocurrencies for tax purposes? The high volatility and various valuation methods (FIFO, LIFO) complicate the tax valuation.

Do international tax treaties take cryptocurrencies into account? Many existing agreements do not explicitly take cryptocurrencies into account, but there are efforts to adapt them. The OECD is working on guidelines.