By Casper Schouten, VP at Teknos
Co-authored by Mo Yang, CEO of Convoy Finance
As the world becomes more borderless for capital and talent, a growing number of high-net-worth individuals are packing their digital wallet and plotting their exits from the U.S. and Canada. But before you bid farewell to Uncle Sam, there’s one last bureaucratic hurdle, the expatriation tax.
Casper and Mo have guided many crypto-native entrepreneurs through this complex process. And if there’s one thing we’ve learned, it’s this: leaving a tax regime is not as simple as handing in your passport and hopping on a plane. It’s a formal, often bureaucratic process that demands precision, planning, and a good professional to guide you through it.
The U.S. Exit Tax: Uncle Sam’s Parting Gift
In the U.S., expatriation applies to both citizens and long-term green card holders. Since 2008, thanks to the Heroes Earnings Assistance and Relief Tax Act (HEART), the government has wielded a “mark-to-market” tax system. In plain English: you’re taxed as if you sold all your assets the day before you leave—even if you didn’t.
If you meet certain thresholds—net worth over $2 million, average annual tax liability over $190,000 for the past five years, or failure to certify five years of tax compliance—you’re labeled a “covered expatriate”. This simply means that you’re considered a high net worth individual and therefore potentially more likely to engage in tax evasion maneuvers.
To exit cleanly, you must:
- Renounce citizenship or abandon your green card (Form I-408).
- File IRS Form 8854, certifying five years of tax compliance and disclosing your global assets.
Then, if you’re considered a covered expatriate as defined by the IRS, your crypto, real estate, and even your illiquid startup shares will be marked-to-market. Potential unrealized gains will be tax as if they’ve been sold – triggering capital gains tax on unrealized profits. As of 2024, the first $866,000 in gains is exempt, but everything above that is fair game.
Digital assets like Bitcoin and Ethereum are included, and their volatility can create “phantom income”, and even worse, illiquid tokens, like founder allocations at low a tax basis (often issued by offshore foundation), can create a huge tax bill and a lot of added uncertainty.
Canada’s Departure Tax: Nice Bureaucracy
The Canadian Revenue Agency (CRA), being a more equal opportunist, doesn’t care how rich you are—everyone pays the departure tax. You can keep your passport and citizenship but you must file a final return marking your exit date as you have established a new life often in a better tax jurisdiction.
Mo Yang puts it this way: “The U.S. has Form 8854, Canada has NR73. Different names, same goal: make it hard to leave. In Canada, you need to make sure it looks like you are not going to be back and your intention is to establish a new life. Having a formal offer or job really helps.
To exit Canada:
- Establish permanent residency elsewhere.
- Sever significant ties—property, bank accounts, family, jobs, even your provincial driver’s license and health card.
- Form NR73 is called the determination of residency and we often advised client to go through the questionnaire but refrain from sending it in. The goal here is for the expatriate to understand what the CRA refers to when considering how strongly you have cut your ties with Canada. We don’t necessarily want to disclose all of this to the CRA though.
There’s no “covered expatriate” concept, but like the IRS, the CRA will tax you on the deemed disposition of your assets. The CRA will scrutinize your final return, especially if you’ve been creative with valuations. Planning 12–24 months ahead is key, especially since post-exit asset depreciation essentially causes over-taxation.
Crypto Complications: Valuation Is Everything
Whether you’re leaving the U.S. or Canada, the valuation of your digital assets, or interest in web3 companies, is central to your tax bill. For digital assets, valuation is often highly complex.
Key challenges include:
- Volatility: Tokens can swing 10–20% in a day, sometimes more. Therefore, timing matters significantly. Accurate timestamped pricing from reliable exchanges or aggregators is essential. Timing your exit and liquidation to pay for the tax bill is also particularly important as crypto assets can be dilutive in nature and token unlocks could potentially put downward pressure on prices as time passes by.
- Restricted Tokens: Vesting schedules and lockups could justify discounts relative to the tokens trading price under the standards of Fair Market Value (FMV). Many token holdings are in early-stage projects or subject to vesting and lockup schedules. Illiquid or locked tokens require an FMV analysis that incorporates the imposed restrictions.
- Illiquid Tokens: Thin order books mean spot prices may not reflect FMV. Although tokens might be “publicly trading”, genuine liquidity often remains elusive. Order books tend to be shallow, and significant token sales frequently result in substantial slippage. This constrained liquidity creates an opportunity for slippage analyses, which can justify meaningful discounts from spot prices. This can potentially alleviate some of the tax concerns related to expatriation.
- LP Interests: LP Interests often lack transparent price discovery mechanisms. Valuation may require complex models to estimate the FMV.
- Entity Holdings: Tokens held via offshore entities must be valued based on beneficial ownership. Many crypto entrepreneurs hold tokens through offshore foundations, trusts, or corporate entities. Understanding beneficial ownership and correctly valuing the interest in such structures is necessary for accurate tax reporting.
A team of a good (tax) advisor and a valuation specialist can help you substantiate your filings, potentially reduce your tax risk significantly, and survive or even better, avoid a painful audit. Given these complexities, many expatriating individuals – particularly those active in Web3 – retain independent valuation and tax advisors to assist with:
- IRC 877A (U.S.) or ITA Section 128.1 (Canada) compliance
- Form 8854 (U.S.) reporting, including balance sheet disclosures
- Fair market value determinations for tokens, NFTs, and equity positions
- Audit readiness – with documentation that can withstand scrutiny and from tax authorities
- Proper additional disclosure tax filing, working with an experienced team can reduce the likelihood of a successful audit and lower the chance of a challenge by the tax authorities.
Professional valuation can also play a role in tax optimization strategies prior to expatriation – such as transferring assets to entities or trusts, realizing losses to offset gains, or strategically using gifting exemptions available in the US.
Final Thoughts: Plan, Value, Exit
Expatriation offers freedom but not without a final exam. For crypto founders and investors, the stakes are even higher. With proper planning, expert valuation, and a clear understanding of the rules, you can make your exit with confidence and avoid the agony of indecision and constant stress. So, whether you’re trading your hardware wallets for a palm tree or just seeking a friendlier tax regime, remember that the taxman is always looking for a final handshake.
Expatriation in the Age of Crypto
By Casper Schouten, VP at Teknos
Co-authored by Mo Yang, CEO of Convoy Finance
As the world becomes more borderless for capital and talent, a growing number of high-net-worth individuals are packing their digital wallet and plotting their exits from the U.S. and Canada. But before you bid farewell to Uncle Sam, there’s one last bureaucratic hurdle, the expatriation tax.
Casper and Mo have guided many crypto-native entrepreneurs through this complex process. And if there’s one thing we’ve learned, it’s this: leaving a tax regime is not as simple as handing in your passport and hopping on a plane. It’s a formal, often bureaucratic process that demands precision, planning, and a good professional to guide you through it.
The U.S. Exit Tax: Uncle Sam’s Parting Gift
In the U.S., expatriation applies to both citizens and long-term green card holders. Since 2008, thanks to the Heroes Earnings Assistance and Relief Tax Act (HEART), the government has wielded a “mark-to-market” tax system. In plain English: you’re taxed as if you sold all your assets the day before you leave—even if you didn’t.
If you meet certain thresholds—net worth over $2 million, average annual tax liability over $190,000 for the past five years, or failure to certify five years of tax compliance—you’re labeled a “covered expatriate”. This simply means that you’re considered a high net worth individual and therefore potentially more likely to engage in tax evasion maneuvers.
To exit cleanly, you must:
Then, if you’re considered a covered expatriate as defined by the IRS, your crypto, real estate, and even your illiquid startup shares will be marked-to-market. Potential unrealized gains will be tax as if they’ve been sold – triggering capital gains tax on unrealized profits. As of 2024, the first $866,000 in gains is exempt, but everything above that is fair game.
Digital assets like Bitcoin and Ethereum are included, and their volatility can create “phantom income”, and even worse, illiquid tokens, like founder allocations at low a tax basis (often issued by offshore foundation), can create a huge tax bill and a lot of added uncertainty.
Canada’s Departure Tax: Nice Bureaucracy
The Canadian Revenue Agency (CRA), being a more equal opportunist, doesn’t care how rich you are—everyone pays the departure tax. You can keep your passport and citizenship but you must file a final return marking your exit date as you have established a new life often in a better tax jurisdiction.
Mo Yang puts it this way: “The U.S. has Form 8854, Canada has NR73. Different names, same goal: make it hard to leave. In Canada, you need to make sure it looks like you are not going to be back and your intention is to establish a new life. Having a formal offer or job really helps.
To exit Canada:
There’s no “covered expatriate” concept, but like the IRS, the CRA will tax you on the deemed disposition of your assets. The CRA will scrutinize your final return, especially if you’ve been creative with valuations. Planning 12–24 months ahead is key, especially since post-exit asset depreciation essentially causes over-taxation.
Crypto Complications: Valuation Is Everything
Whether you’re leaving the U.S. or Canada, the valuation of your digital assets, or interest in web3 companies, is central to your tax bill. For digital assets, valuation is often highly complex.
Key challenges include:
A team of a good (tax) advisor and a valuation specialist can help you substantiate your filings, potentially reduce your tax risk significantly, and survive or even better, avoid a painful audit. Given these complexities, many expatriating individuals – particularly those active in Web3 – retain independent valuation and tax advisors to assist with:
Professional valuation can also play a role in tax optimization strategies prior to expatriation – such as transferring assets to entities or trusts, realizing losses to offset gains, or strategically using gifting exemptions available in the US.
Final Thoughts: Plan, Value, Exit
Expatriation offers freedom but not without a final exam. For crypto founders and investors, the stakes are even higher. With proper planning, expert valuation, and a clear understanding of the rules, you can make your exit with confidence and avoid the agony of indecision and constant stress. So, whether you’re trading your hardware wallets for a palm tree or just seeking a friendlier tax regime, remember that the taxman is always looking for a final handshake.