Tax Risk

This document is focused on risk associated with making mistakes related to tax. It only mentions legal tax avoidance and illegal tax evasion for context.

Tax Avoidance

Avoiding tax is legal. Many members of the crypto community – which leans Libertarian – will add that tax avoidance is a moral imperative since you are better at allocating your capital than any government.

No matter your moral opinion on the question, your shareholders will likely be in favor of your avoiding tax in any legal way possible.

Tax Evasion

Tax evasion is a crime. We know that some people disagree, but it doesn't matter. If the State considers it a crime, they will prosecute it, and punish the protagonists.

Tax evasion can destroy a company or project.

Mistakes

When it comes to moral obligations, intent is everything. A person can't commit a sin if he doesn't know it's a sin. In legal matters, things aren't so black and white. Intent may lessen the punishment, but often doesn't eliminate it.

Tax authorities are rarely forgiving. They also have very strong opinions about how a tax law should be interpreted. Your interpretation (or your accountants' or lawyers') doesn't matter so much. If a tax authority thinks you've made a mistake, you'll almost certainly pay a fine.

The implication is that tax avoidance has a downside. The more aggressive the avoidance strategy, the more likely some tax authority will disagree with it.

Of course, the difference between legitimate tax avoidance, tax evasion, and an honest mistake can be impossible to discern since tax forms never include a box for intent.

Mitigation

Pay your taxes. That's an easy on.

Avoid being overly aggressive in your tax avoidance. What this means depends entirely on your risk appetite.

Keep in mind that you'll never avoid mistakes. Tax mistakes are like software bugs.

Jurisdiction

Some jurisdictions (e.g., BVI) don't levy any corporate taxes. Incorporating in a jurisdiction like that is a simple way of avoiding corporate tax liability. Keep in mind, though, that many factors may cause other tax authorities to claim the right to tax your profits.

As with all tax issues, it's never black and white.