The American-Sino trade war initiated by President Trump in late 2017 was roiling the global economy long before the coronavirus pandemic struck.
Between 2018 and 2019, the United States imposed tariffs on more than $550 billion worth of Chinese goods. China retaliated by imposing tariffs on $185 billion worth of American goods.
Trump’s trade war has devalued China’s yuan and caused severe economic distress in the country.
As a result, Chinese citizens have begun transferring billion of dollars out of the country via transnational cryptocurrency transfers and foreign cryptocurrency investments.
Since 2019, mostly wealthy Chinese citizens have transferred more than $50 billion overseas via cryptocurrency transfers.
These cryptocurrency transfers are being committed in brazen defiance of Chinese capital limits regulations — rules meant to fence in a nation’s currency and to avoid “runs” that can devastate government accounts.
Can American citizens do the same?
That depends on how much attention you want from the IRS. The IRS considers cryptocurrencies a form of property subject to taxation — not legal tender.
To fully answer that question, let’s first examine how Chinese citizens are illegally sending crypto out of the country.
How it’s done
According to a report by Chainalysis, a firm which profiles blockchain businesses, rich Chinese are mostly using the stablecoin Tether. A stablecoin is a cryptocurrency backed by a traditional reserve asset, such as the U.S. dollar, in order to offer financial stability and less volatility.
These actions are notable because Chinese citizens are only legally allowed to buy up to $50,000 in foreign currencies.
Wealthy Chinese citizens usually get away with such contraventions via foreign investments in diversified assets or real estate. They have also been known to spirit monies out of the country via foreign investment in shell companies.
The fact that China has imposed draconian regulatory crackdowns on direct exchanges of yuan-to-cryptocurrency exchanges probably hasn’t helped matters either.
Using cryptocurrencies to get away with cash transfers is a new twist to well-worn financial practices in the country. Chainalysis also noted that these actions imply that there must be extreme limitations in China for private ownership and investment.
American crypto running?
If you want to move significant amounts of money out the United States, like a Chinese citizen might, you must understand how the IRS and American government views cryptocurrencies.
The IRS does not consider cryptocurrencies as money, financial assets, or a foreign bank account.
Cryptocurrencies are viewed by the IRS as a form of property liable to taxation via capital gains tax rates.
As an American citizen, you must report any foreign bank accounts, assets, or investments over $10,000 to the government. You must file a report of Foreign Bank and Financial Accounts (FBAR).
If you buy, invest, or transfer cryptocurrencies out of the United States, you are supposed to report it to the IRS. You then pay taxes on them according to the capital gains tax interest rates relative to your home state.
Depending on your income and where you live, your capital gains tax interest rate can be zero, 15%, or as much as 20%.
Failure to report cryptocurrencies transactions can result in fines of $100,000 and possible incarceration.
Since cryptocurrencies only became a ubiquitous cultural term in the late 2010s, many American are unaware of these regulations.
If you try to transfer large amounts of cryptocurrencies out of the United States, the likelihood is that will probably attract more federal attention to yourself than the Chinese government apparently exerts over its own citizens.