What are the main considerations in the creation of a tax structure to optimize the efficiency of digital asset operations? The answer is that they are different for everybody.

For individuals with a large holding who have little income generated by the cryptos, holding in their own name and suffering individual CGT rates of currently up to 20% is likely to be the most tax-efficient way of holding their cryptos. Where excess income is being through the holding of cryptos (through staking etc.) then there may be merit in looking at alternative holding structures for the cryptos: this is where companies come in. Family investment companies or personal investment companies may be suitable for that purpose.

These corporate structures will lead to the income being taxed at corporation tax rates, currently 19%, rather than personal income tax rates. Albeit, when the money is taken out from the company through dividends, the individual will be subject to dividend tax rates on the income to them.

If an individual is older in age and has children or grandchildren, the extra dimension of inheritance tax implications should be considered.

If the holder is young, they are likely to wish to look for the most tax-efficient way of growing their investments.

The key point is that, if you can meet capital gains tax liability in your own name and there isn’t excess income being generated by the crypto holding, it may be advantageous to hold the crypto in your own name over holding it through a corporate entity as, when the shareholders take money out of their company, there are two sets of taxes: corporate tax on the income and gains made from the crypto and then individual taxes on the dividends declared by the company.

From the US perspective, the considerations are similar. An individual may want to consider whether there is any trust vehicle that can be created to take advantage of lifetime exemptions amounts while they are still high.

In the US, many people—especially engineers—have tried to set up joint ventures to exchange platforms or to create a liquidity pool for the participation of multiple parties. These exchange protocols can create a number of legal and tax issues, so it is important to discuss such plans with legal and tax advisors before creating these structures.

It is important in either the US or the UK to seek the right advice from the outset—and to consider your exit from the outset as well.

Once these entities are created, it is difficult to rewrite the past if the strategy turns out to bear tax consequences that could have been mitigated with the right counsel.

Thomas Hulme of Mackrell.Solicitors moderated a conversation with Geriant Jones, Jon Wedge and Sam Inkersole of BKL and Yu-Ting Wang, Armanino LLP, and other tax professionals at the Mackrell International webinar titled “Digital Asset Tax Issues.” You can view the entire session at https://youtu.be/davbCdhw3TQ