Tax Efficient Trading Structures for US Exposed Crypto Traders

Please visit htj.tax for interviews with thought leaders like Marcelino Fuller.   But today, we are going to discuss structures for those that trade in crypto currency.

It would be helpful to first identify the differences between a crypto trader and crypto investor which I previously discussed here – 


If you are an investor, your situation is relatively straightforward from a tax perspective.  Traders have options as discussed in the link above.  I discuss US taxes from a digital currency investor perspective here – https://htj.tax/2021/05/crypto-tax-calculations/

For traders, keeping track of daily transactions can be a challenge.  It can be dozens per day or maybe even millions per day if you are an algo trader.  Our accounting team can help with 

  1. Preparing accounting manuals and audit assistance
  2. Preparing financials (Income Statements and Balance Sheets) from the massive data sets, once we have access to the source data to process it using International Accounting Standards – particularly around the MTM or Mark to Market Methodology.
  3. Integration into cloud accounting software like Xero and QuickBooks 

For crypto traders that are not US exposed (that is, they do not have US passports or US residency), it can be relatively simple.  However, crypto exchanges outside of the US, are understandably nervous about US exposed investors or traders.  These crypto exchanges are changing their rules moment by moment so please check with them directly.  Assuming that a Crypto Exchange accepts structures with US money, US exposed traders worry about both CFC and PFIC rules which may essentially penalize them from a US tax perspective

PFIC – https://htj.tax/2021/07/us-investors-in-foreign-companies-that-turn-into-pfics/

CFC rules such as GILTI – https://htj.tax/2018/02/us-exposed-owner-of-international/

We have seen many so called “hacks” to evade US tax rules.  All we say is that if it is too good to be true, it normally is.  Always get good professional advice.  To legally avoid triggering US tax rules such as PFIC and GILTI, more sophisticated traders typically choose to set up a simplified Prop Trading Structure.

What is Proprietary Trading?

Proprietary trading refers to a firm that invests for direct market gain rather than earning commission dollars by trading on behalf of clients.  Investopedia tells us that it is also known as “prop trading,” and this type of trading activity occurs when a financial firm chooses to profit from market activities rather than thin-margin commissions obtained through client trading activity.  Proprietary trading may involve the trading of stocks, bonds, commodities, currencies or other instruments.

Now in terms of the actual structure, if you want to take on outside money, we can introduce you to attorneys that would assist you with the regulatory requirements.  Yes there are unqualified DIY websites but we always suggest that you get professional advice to reduce the chance of having accounts frozen or triggering unnecessary audits.  For those who will only be trading on behalf of themselves with no outside money, please continue reading.

  • For the actual trading entity, we propose a Cayman Trading LLC.  Assuming that you are not taking outside money, you would not necessarily need to navigate the compliance requirements around Cayman funds.  It would be a regular exempt company and this would be the exchange member that conducts the trading
  • The Cayman Trading entity would be owned by a Cayman Holdco.  It should be a flow through for US tax purposes and a blocker for non-US purposes.  This is how the aggressive US tax rules such as PFIC are legally avoided
  • The management function could then be performed by a US entity.  Depending on your overall tax situation, it would either be an LLC or a C Corporation.  A trading advisory agreement would be needed which would include appropriate transfer pricing analysis  
  • Having proper accounting is absolutely key.  Proper accounting means accurate and credible tax reporting.  This is the only way to ensure that you are comfortable in responding to any queries from the IRS or any regulator

If you are 

  • A successful trader in digital assets 
  • Looking to create a tax efficient but legal structure 
  • In need of an experienced crypto accounting team to help you get control of millions of complex trading records

Contact us today 

Links to Accounting Standards used in Digital Asset / Crypto Reporting

IAS 1 – Presentation of Financial Statements


IAS 2 – Inventories


IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors


IAS 10 – Events Occuring After the Reporting Period


IAS 21 – Effect of changes in foreign exchange rates


IFRS 9 – Financial instruments


IFRS 13 – Fair Value Measurement


Discussion Paper Accounting For Crypto-assets (Liabilities)


Accounting for Crypto assets (liabilities)


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