Education

Offshore Crypto Wallet: What the Crypto-Rich Know That You Don't!

Offshore crypto wallets are not what you think they are...

Shayan Chowdhury, Andrei Rotariu

Aug 23, 2022 • 6 minutes read

Offshore crypto wallets are gaining more and more attention every day as regulators all over the world inch closer and closer to your digital assets (AKA you're hard-earned money!).

For this reason, we're now going to explore what offshore crypto wallets are and how they can help!

Offshore Crypto Wallet

Whether you hold Ethereum or Bitcoin, you need a crypto wallet to store your digital assets and ideally, in this case, one that the regulatory and tax tentacles cannot touch and suck dry, if that is your MO.

Working Module of Crypto Wallets

Let’s start this discussion briefly by describing the meaning of crypto wallets.

Crypto wallets are usually a type of software that gives you complete access to store the cryptocurrency that you want to own and control.

Generally, crypto wallets fall into two categories, but of course, there are many other types of actual wallets and they all operate slightly differently, but for now, we'll focus on these two categories just so that we're all on the same page for the remainder of this article.

Hot Wallet: A wallet is referred to as a hot wallet when it pertains to the internet directly. The internet connection is what defines it as "hot". Today, the internet is not secure, and so neither are your crypto funds. Therefore, crypto assets stored in a hot wallet are always at a slight risk of being hacked.
Cold Wallet: Cold wallet is just the opposite of a hot wallet. Cold wallets do not have connections to the internet. Thus, there is reduced risk across the internet as the wallet is offline.

Besides that, a crypto wallet can be defined further in terms of the way that they operate via "keys". There are two keys named public and private keys. These keys are what make the wallet, a wallet.

Public Key: Public key is basically a wallet address that anyone can access if they want to connect with you. It is just like a bank account number for the sender in order to send money, like sending crypto to your wallet. In fact, it's similar to your physical street address, it is public and anyone can send a letter or parcel to you if they know your address.
Private Key: The owner of a crypto wallet can access his crypto through this key. This private key acts just like a pin number that is used to open your wallet. This key must be secured or kept confidential and should not be shared with anyone. Normally this key is hidden in the backend of the software.

What Exactly Is an Offshore Crypto Wallet?

The term "offshore crypto wallet" is a deceptive one. You'll come across dozens of other websites and articles going on long-winded tangents trying to explain what an offshore crypto wallet is and nine times out of ten they will go into depth on what wallets are and how they work but they will rarely ever answer the question, because they very likely and simply do not know or they do not care.

We'll explain what it really means below.

There Are Two Ways That We Can Define What an Offshore Crypto Wallet Is

First, we can describe it in the practical sense. A crypto wallet that enables users to have full ownership of their digital assets, but critically, one that is not in their home country or country of residence AKA offshore.

For example, if you have a property, a family member, or a company based overseas and you decide to set up a crypto wallet in that country and leave it there, whether it be in a laptop that resides in that country or in a crypto exchange account in that same country, it is by definition offshore.

You could describe an offshore crypto wallet in this very simplistic sense. It is a crypto wallet and it is offshore. However practical this example is, it is also deceptive because linguistically it lacks the correct meaning.

The Answer

When we use the term offshore crypto wallet what we really mean is a legal offshore entity for managing your cryptocurrency that could protect your crypto from being seized and one that provides tax incentives or in some cases means you pay zero tax or near zero tax on your cryptocurrency.

With the practical example provided above there is no formal protection, just setting up a crypto wallet in another country or taking your cold hardware wallet and leaving it there is silly and would not work because the digital assets are still legally tied to you in one or both countries and this means there are limited protections and no additional tax benefits.

A great way to understand what an offshore crypto wallet is or is not, is to compare it to an offshore bank account.

What Is an Offshore Bank Account?

An offshore bank account is a bank account that is located in another country, separate from your country of residence and business activities.

Offshore banks as we like to think of them, are usually regulated by different local or international bodies and in many cases are set up and managed by smaller nations like Belize because this is a way for them to attract international investment.

Offshore bank accounts attract negative attention because they are seen by many people as only being used by criminals but the reality is that tax avoidance is legal and many entities around the world such as high-net-worth individuals or corporations set themselves up to pay as little tax as possible, but also to protect themselves and their assets and one of the methods they use, is offshore bank accounts.

These offshore accounts are not just used for tax avoidance though. There are many other reasons someone would use an offshore account being international business purposes or perhaps if you are an ex-pat.

Offshore banks are usually set up in connection with an offshore company such as a limited liability company (LLC) which is a type of business structure in the US that protects the business owner from legal disputes and financial claims or demands but one that also allows them to make investments and open bank accounts via the LLC.

The idea that you can just set up an offshore bank account and hide your money is kind of outdated. Nowadays most countries share financial information and scrutiny has never been higher.

Benefits of Offshore Crypto Wallets

While crypto wallets don't function the same as bank accounts because anyone can just download a wallet and begin using it by transferring crypto in and out of it, the key similarity is that to set up an offshore crypto wallet and to do it legally and in a way that protects you, you would first set up an offshore company or trust like an LLC and then manage your crypto holdings through that offshore entity.

There are two main advantages to lawfully setting up offshore crypto wallets:

Tax Advantages

Some countries do not tax crypto in the same manner as the US, Australia, or the UK does and in fact, there are a number of nations that do not tax crypto at all. For example, we previously spoke with Jin Gonzalez from Oz Finance about creating a near-zero tax zone in the Philippines. You can check that out here.

So, not only are there crypto-tax-havens that exist that you may benefit from if you set yourself up correctly (and legally) but also, even if you're not aiming to completely reduce tax payments but instead you just want to reduce the burden of reporting, setting up, and managing an offshore crypto wallet might mean that taxable events like crypto trading are far easier (and cheaper) to report on as Stewart Patton describes in this article.

Privacy

Offshore companies that manage your crypto wallet and holdings might mean better privacy overall.

Many American crypto exchange companies as well as those in the UK, EU, and Australia have to comply with KYC and AML regulations and laws which means that they require certain amounts of private information which is not always the case with other more private or completely anonymous exchanges that you may not have access to under normal circumstances and so, therefore, setting up shop as an offshore entity in a smaller country might provide you legal access to these exchanges that have no KYC or AML requirements and yet you can still legally report on your holdings while maintaining levels of privacy with the exchanges or third parties such as brokerage firms.

This is also true for banks. All modern banks have information that they require in order to complete the account creation process. However, some offshore banks have reduced requirements and some none at all meaning that if you have correctly and legally created your offshore business entity and you now want to purchase crypto while remaining private, you could also do it via the offshore bank and you may not have to provide personal and private information to the bank which you then make the crypto purchase or investment through and hence add an additional layer of security and privacy.

Conclusion

An offshore crypto wallet in simple terms is a wallet that is offshore.

A properly functioning offshore crypto wallet that can provide tax and privacy benefits is set up and managed by an offshore entity, can be connected to an offshore bank account, and is usually but not always operated from a crypto-tax-friendly nation.