Can citizenship by investment help you benefit from cryptocurrencies?

Thought Leadership by David Lesperance JD, Founder & Principal Lesperance & Associates

Sudden wealth and how to protect it

Could you please humour me for a moment? Let us imagine your doorbell ringing unexpectedly. An attractive woman waves a cheque in your face and cheers erupt, “You have won US$15 million in the Lottery!” The blonde trills, “Here is your money! You will be on the front pages tomorrow!” It won’t ever happen. Neither to you nor to me. But such life-changing incidents do take place each year to a very tiny minority of random folk. Like all winners, they will splash the champagne around for three or four days before they think of the enormous responsibility newly thrust upon their shoulders. The substantial winnings of such people can be compared to the fortunes of established high-networth (HNW) individuals in terms of the amount of cash involved. But in terms of investment history, mental discipline and financial acumen, there is no comparison.

HNW circles have - over decades, even centuries - established family offices to safeguard and build their assets. Experienced experts on property, industry and high tech ensure steady growth and profits. The story arcs, for the surprise winners in this life are entirely different. Lotteries bring sudden rewards. So do legacies, sudden deaths and calamities. But what mechanisms are there to help and guide these people?

Today, I want to highlight a new type of sudden wealth winner – a species that has leapt ahead over the last ten years: the medium to long-term possessors of cryptocurrency. We have all heard the mad crypto stories; the San Francisco programmer who can’t access over US$200 million in a ‘crypto wallet’; an entrepreneur who lost 800 Bitcoins when a colleague reformatted his laptop or the Welshman who searched a landfill site for months to recover 7,500 Bitcoins.

HNWs should all have a backup plan to protect themselves and their families from economic, political or societal upheavals. And this is where citizenship by investment comes in.

Common to so many tales has been the happy-go-lucky approach of hundreds of cool, relaxed Bitcoin enthusiasts. Think student/artist/teacher/’free spirit’. The crypto industry began in 2009 when the first 10,000 Bitcoins were valued at two Papa John’s pizzas! Accordingly, www.wealthmanagement.com relates that each Bitcoin would have been worth some US$0.15. No wonder the free spirits treated these puzzling inventions so casually. Since every Bitcoin today is worth well north of US$60,000, then 10,000 of them would have added up to US$600 million. The world now faces a situation where some 20 percent of the 18.5 million Bitcoin existing early in 2021, worth US$140-200 billion, appear to be lost, according to cryptocurrency firm Chainanalysis.

This gigantic cautionary tale is shocking. But what can and should crypto holders do to continue safely storing their crypto in future years? Do I need a backup plan? This is the question I often hear from potential clients, especially in relation to crypto. In response, I often use the ‘wildfire’ analogy. Why wildfire? These fires destroy valuable neighbourhoods and lives. If one happens nearby, you definitely want an escape plan and comprehensive fire insurance for yourself and your family. The same principle applies to HNWs – whether their assets come from traditional investments such as property, stock exchanges, and high-tech – or such new sources as cryptocurrencies.

HNWs should all have a backup plan to protect themselves and their families from economic, political or societal upheavals. And this is where citizenship by investment comes in. Crypto investments are particularly sensitive. The assets, however much they are worth, are not tangible. Despite a massive increase in value over the last 12 years, they have suffered major swings and continue to be volatile. So what do you need for your own backup plan? I use three headings to define the wildfire issues:

FIRE PREVENTION: First, learn the tax rules relating to taxable events, capital gains vs ordinary rates and reporting requirements. Take advantage of tax loss and gifting opportunities. Basically, do everything within your jurisdiction to make you more tax efficient. Unfortunately, many jurisdictions are changing the rules around crypto, making planning fluid and difficult.

FIRE INSURANCE: Review international alternatives to your current tax home. Along with understanding your (and possibly your family’s) needs and preferences, you need to secure independent professional advice on the immigration, tax, pre-immigration tax planning involved in various second residence and citizenship options.

FIRE ESCAPE PLAN: Once you have the ‘fire insurance’ of a second residence and/ or citizenship, then you need to secure professional advice on the issues involved in leaving your current tax jurisdiction. This may include tax, currency control and dual citizenship issues. With the steps and costs of executing a ‘fire escape plan’ from your current tax home clearly and properly set out, it is easier to then compare that to the costs of remaining. This makes the decision of whether to and when to execute this fire escape plan apparent.

The conclusion? Whether your wealth comes from yesterday’s lottery, ten-year-old crypto purchases, or thanks to wise grandparents, get the best advice from proven experts. If you are an HNW individual, whatever the legal source of your wealth, go for the strongest option available that gives the best long-term advantages. As to crypto: treat it as an investment like any other. And the best protection for it? The right fire prevention, insurance, and escape plan.

David Lesperance

www.lesperanceassociates.com

ISSUE 12 • DECEMBER 2021