In 2019 the Wall Street Journal reported that the IRS wrote to more than 10,000 US
taxpayers who owned cryptocurrency, accusing them of failing to declare trading income. In this article, we look at how investors could potentially use Malta Pension Plans to manage cryptocurrency investments to defer or substantially reduce their tax liability.
What is cryptocurrency?
Cryptocurrency is a digital or virtual payment form. Because it is secured through cryptography, it is almost impossible to forge or spend more than once. Many cryptocurrencies are based on blockchain technology, a type of computerized ledger system. Since they are not usually issued or regulated by a central authority, cryptocurrencies are generally immune to government manipulation or interference.
The world’s first form of cryptocurrency was Bitcoin, which remains immensely popular and valuable today. Today there are thousands of different types of cryptocurrency, each with its own distinct specifications and functions.
In 2017 US tax legislation was amended to include cryptocurrency profits as taxable gain income, attracting federal tax liabilities at a rate of up to 23.8 percent for amounts held over a year.
What is a Malta Pension Plan?
In 2011 the US-Malta Income Treaty came into effect. Under Article 4 of the treaty, any pension fund established either in the United States or in Malta may be treated as “resident” if it meets certain the treaty requirements. Treated as a foreign grantor trust from a US perspective, income generated within a Malata Pension Plan is effectively exempt from federal taxation when an appropriate treaty claim is made.
The effect of the US-Malta Income Treaty read in conjunction with US tax law is that contributions and distributions from Malta Pension Plans can be substantially free of tax for US taxpayers at the federal level.
In comparison with a Roth IRA, a Malta Pension Plan confers several distinct advantages. If the investor draws a distribution from a Roth IRA before reaching the age of 59 1/2, the distribution is subject to normal tax treatment and incurs a 10 percent early withdrawal penalty.
Conversely, individuals investing in a Malta Pension Plan can make penalty-free withdrawals from the age of 50. In fact, on attaining the age of 50, Malta Pension Plan investors can draw down a lump sum payment of up to 30 percent of the total pension fund value without incurring tax liabilities in either Malta or the United States. Also, while Roth IRAs have a contribution cap of $6,000 per annum for those under 50 and $7,000 for those over 50, Malta Pension Plans have no such limitation on contribution.
Finally, with a Roth IRA, contributions must be made in cash, but with a Malta Pension Plan, contributions may consist of alternative assets such as real estate, life insurance, foreign investments, or cryptocurrencies.
A Malta Pension Plan is a powerful vehicle in terms of tax deferral
Under the terms of the US-Malta Income Treaty, read in conjunction with US tax law, a significant percentage of deferred gain can be contributed to the plan without incurring tax at contribution. This means that individuals can invest cryptocurrency directly into their pension plan, negating the need for liquidation and the subsequent declaration of gains. Further, the flexibility of the plan for future deferral and distribution of plan assets makes the Malta Pension Plan a great retirement tool for Cryptocurrency owners.