Best and worst countries for crypto taxes — plus crypto tax tips – Cointelegraph Magazine
Tax is a nightmare for compliance. And crypto taxes — which include a variety of innovative mechanisms and products that have no analog in traditional finance — are 10 times worse.
Complicating matters even further, the global industry operates across borders and jurisdictions. But there are definitely better and worse countries for the newly crypto-rich to base themselves as tax havens — even Americans who get followed around by the IRS with its hand out no matter where they are.
(The information provided is not legal or financial advice and should serve only as a starting point for further research.)
To start off, we need to define what income and capital gains are.
What is income for crypto tax?
Income tax generally covers things such as wages, dividends, interest and royalties. Within the context of digital assets, these might include income earned via mining, staking, lending, crypto-denominated salaries and even airdrops.
In many jurisdictions, these would be taxed according to the market value on the day they were received. You can often subtract expenses (such as the cost of electricity for mining).
What are capital gains for crypto tax?
Capital gains are the profits from selling things like stock or a house. They are usually calculated on the difference between the price you bought something for and how much you sold it for. In most cases, capital gains are taxed at a much lower rate than normal income, and the sale of cryptocurrency and NFTs generally count as capital gains.
Jurisdiction matters for crypto taxes
The first issue is whether one needs to pay tax at all. In certain countries, including Bahrain, Barbados, Cayman Islands, Singapore, Switzerland and the UAE, no capital gains are generally levied on things like stock or digital asset sales. For most people, determining the country of their tax residence is as simple as answering “where do you live?”
For the lucky few in crypto whose portfolio has gone stratospheric, it’s fairly natural to want to move to a country that will tax them less. Strategically shopping for favorable jurisdictions is comparatively easy for those in the blockchain industry, as their wealth is less likely to be tied to a physical business or assets.
Sadly, American citizens are at a distinct disadvantage because, unlike most countries, the U.S. levies taxes according to citizenship in addition to residency. Even American citizens born abroad must pay U.S. taxes even if they never set foot in the United States. They do, however, have the option of being taxed as a resident of Puerto Rico, a U.S. territory that is not a state. Perhaps fittingly, its name is Spanish for Rich Port. Hervé Larren, a dual U.S. and French citizen, lives on the island. He is the CEO of Airvey.io, which advises Web3 companies, and says:
“This is the best tax residency for Americans — they can keep their U.S. citizenship while benefiting from these tax advantages.”
Puerto Rico is a crypto tax haven
Larren explains that, due to a 2012 law called Act 60, companies moving to or establishing themselves in Puerto Rico can pay a corporate tax of 4% — far lower than on the mainland. There’s also a 0% capital gains tax.
“These incentives have been created by the government of Puerto Rico to stimulate job employment and growth on the island by focusing on promising fields like the blockchain industry particularly,” he says, explaining that the island is envisioning itself as one of the crypto capitals of the United States.
“In order to demonstrate tax residency, U.S. citizens should set up a primary address, a driver’s license and a local voter ID in addition to physically spending six months of the year on the island,” Larren explains.
On the other side of the world, the United Arab Emirates is another tax-friendly jurisdiction attracting crypto wealth, notes Soham Panchamiya, a lawyer at Reed Smith LLP in Dubai.
“As more countries begin to regulate and tax cryptocurrencies, investors will need to navigate complex tax laws and potentially incur higher tax liabilities,” he says. At the same time, he argues that governments should ensure that policies are not made needlessly complicated.
“The taxation of crypto globally has significant implications for both individual investors and governments alike.”
For Panchamiya, increasing regulation by governments can be taken as a sign that the industry is maturing. While the UAE draws industry players with 0% personal tax, he expects that the government is likely to benefit from the introduction of corporate tax later this year.
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Are crypto-to-crypto trades taxable?
Outside of the few no-tax jurisdictions, “crypto-to-crypto trades are mostly taxable, but some countries do not tax them,” explains Filip Kraljičković, an expert on cryptocurrency taxation. He worked as a lawyer and manager of corporate taxation at KPMG in Croatia before joining crypto tax automation firm Taxtris as a tax and legal manager.
Countries that do not tax crypto-to-crypto include France, Austria, Croatia, Poland and, as of 2023, Italy, he says. In such jurisdictions, no taxes are levied as long as crypto assets stay “in the metaverse” and do not get exchanged for fiat.
According to Kraljičković, this type of treatment is gaining favor, and there are direct efforts to implement it EU-wide “because taxing crypto-to-crypto swaps produces cash flow problems” for people in the industry. Notably, most major jurisdictions like the U.S. and the U.K. currently consider trading Bitcoin for Ether a taxable event. Even something as innocuous as “wrapping” ETH into wETH can be interpreted as a trade, as the Australia Tax Office has spelled out (sparking considerable debate):
“When you wrap the ETH you have created a different asset for Capital Gains Tax (CGT) purposes. This means that converting ETH to WETH triggers a CGT event and you have to work out capital gains tax when you convert.”
In many jurisdictions, there is also a difference in tax treatments between short-term and long-term capital gains. In the United States, long-term capital gains get a discount, but selling before 365 days taxes the gains at the same percentage as regular income, which means that the effective tax rate can double. Canada does not differentiate between long- and short-term capital gains, taxing them all at half the rate of income tax.
Crypto tax capital gains rules in Europe
“Germany and Croatia also differentiate between short- and long-term gains — after 12 and 24 months, respectively, the rate is 0%,” Kraljičković explains, adding that, because Croatia does not tax crypto-to-crypto swaps, it is possible to pay no tax even without holding the original asset for a year. It’s also notable that Germany allows up to 600 euros of tax-free short-term gains per year.
“In Croatia, if you are happy with your gain in Bitcoin, you can just transfer your position to stablecoins and wait one to two years to realize your tax gains tax-free.”
“I’m not paid for advertising Croatia, but it’s a favorable place for crypto traders,” Kraljičkovićs says. Even when not using the crypto-to-crypto two-year method, taxes on crypto capital gains are about 10% depending on the city one lives in, he explains.
Some jurisdictions are of course less favorable. In addition to taxing crypto gains at 30%, India has “also imposed a 1% tax deduction at source (TDS) on each trade, claiming it would help them track the movement of funds,” with exchanges saying that such moves are likely to severely affect business.
A similar 0.11%–0.22% VAT on all crypto transactions has been imposed by Indonesia, which Kraljičković describes as a method for the government to track all crypto transactions by imposing a reporting requirement via the otherwise small tax.
Adding to this, India treats cryptocurrency in a way comparable to lottery tickets and other gambling, whereby losses cannot be deducted from gains. “Basically, everybody trading crypto in India fled from local crypto exchanges and started using decentralized apps,” Kraljičković observes.
According to Kraljičković, Estonia is the only European country currently restricting the deduction of losses. “You’re only taxed against your gains, but any losses that you realize are not tax deductible, which is kind of weird from an accounting perspective — but that’s their position.” Marko Jukic, CEO of automated tax reporting software provider Taxtris, mentions that there is currently an active lobbying effort to change this.
Another pitfall that investors should be wary of is the risk of being classed as a professional trader, as opposed to a casual trader or hobbyist. Many governments make this differentiation, but the line can be very blurry and is largely up to tax authority interpretation.
“There are certain factors to take in like the number of transactions, size of transactions, regularity. All these factors can influence the determination of the government,” Kraljičković explains. Those who go pro, even against their will, might have to report all their trading gains as income tax, which carries a much higher rate and otherwise be far more stringent in their accounting. “You will have to behave as a company or as a craftsman depending on jurisdiction.”
How are capital gains calculated?
There is not one single answer. When it comes to calculating taxable gains, the critical step is to calculate the cost basis, which is the amount local tax law considers an asset to have been bought for. There is a good deal of variance between the accounting methods used by different countries. Some countries even let you choose the method as long as you are consistent.
First-in, first-out, or FIFO, is among the most common methods and means that gains are calculated by assuming that the earliest acquired units of an asset are sold first. This means that a person who bought 1 BTC for $10, one for $100, $1,000 and $10,000 over a five-year period and sold one of them in 2022 for $20,000 would be taxed as if they sold the first Bitcoin purchased for $10, resulting in a taxable gain of $19,990.
Average cost is another method, which would calculate the average cost of the assets as the purchase price. Per the previous example, where someone purchased a total of 5 BTC for $11,110, the average price per Bitcoin would be $2,222, meaning that the taxable gain from selling a fifth of holdings in 2022 would be slightly lower at $17,778.
Last-in, first-out (LIFO) sounds nearly the same as FIFO but is effectively the opposite, resulting in a vastly more favorable outcome for our trader, whose taxable gain would now be only $10,000 since the profits are calculated from the most recent purchase opposed to the earliest one.
The tax agencies of many jurisdictions, including those of the U.S., U.K., Australia and Japan have issued guidance explaining that taxpayers can choose one of these methods, with certain limitations and usually provided that they then stick to that method. However, Canada requires the use of cost averaging because the Canadian Revenue Agency (CRA) views cryptocurrencies as commodities and taxes them as such.
Though most readers’ capital gains will fall under one of these accounting systems, there are outliers, such as the “French method,” which is close to the average cost calculation. “Poland and Hungary have their own methods based on cash flow and revenue expense, but European countries otherwise tend to follow the standard methods,” Kraljičković notes.
Whether you use FIFO or LIFO, capital gains are typically calculated by adding up all the year’s losses and gains followed by subtracting the total losses from the gains. As such, it is possible to find that the net gains are negative, in which case no taxes would apply and losses could possibly be counted against gains in the following year, again depending on the jurisdiction. An exception to the above can be found in India and Estonia, which Kraljičković says do not allow losses to be deducted from crypto tax calculations.
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Crypto tax loss harvesting
“If the market goes down, you can sell assets to create a loss to offset gains,” Kraljičković remarks.
This is called tax loss harvesting and can sometimes result in even a large net gain becoming tax-neutral through the reduction of capital gains liability. It can be employed strategically at the end of the tax year because taxes are usually calculated on an annual basis. Immediately in the new tax year, both the gaining and losing assets can be rebought.
“In the U.S., tax loss harvesting is banned for securities but not for crypto, so people in crypto usually sell off their loss positions before the tax year ends.”
This, however, is illegal in the U.K. and Ireland, Kraljičković notes. “They will spot the loss and rebuy happening within 30 days and disallow the losses,” he says, adding that similar restrictions will likely arrive across the European Union. “It’s a matter of time before countries figure that out and apply that anti-abuse rule,” he predicts. In fact, President Joe Biden has proposed making the practice illegal this year.
Can NFTs be tax-loss harvested?
“There is no accounting method for NFTs because they are nonfungible, so you can always easily identify profit — for fungible assets like Bitcoin, you don’t know which Bitcoin you sold, which is why the FIFO method exists,” Kraljičković reasons.
That said, he describes NFTs as “a complicated conversation” — Europe, for example, does not have much of the guidance or terminology sorted out. “More or less, they are treated like cryptocurrencies,” Kraljičković says, implying it is largely a default position in the absence of clarity.
When it comes to NFTs, it’s also worth noting that some countries such as Spain, Poland and Belgium treat at least their initial sales in the same way as the provision of virtual services, like a Netflix service, Kraljičković expands. In these cases, Value-Added Tax (VAT) applies.
“There is a third type of tax in addition to income and capital gains, and that’s the wealth tax — you’re paying taxes based on your portfolio value on a specific date,” Kraljičković adds. For example, Spain, Switzerland, the Netherlands, Norway and Argentina collect wealth taxes that are based on the net wealth of taxpayers each tax year.
Norway, for example, charges a flat 0.85% of wealth above an approximate $160,000 threshold, meaning that someone with net assets worth $1 million at tax time would be expected to pay over $7,000. These rates go as high as 3.5% in Argentina and as low as 0.1% in some areas of Switzerland, sometimes starting at a much higher threshold than Norway’s. “It’s coming to Italy next year.”
While the valuation of fungible cryptocurrencies is relatively straightforward, valuing NFTs for wealth taxes is a different story. In traditional markets, if no liquid market is present such as for property, software or intellectual property, financial experts can be hired to estimate value based on evidence like supporting documentation and expert witnesses.
At this point, however, Kraljičković notes that NFT valuations are a conversation between the tax authority and the individual. “NFTs are very minor sources of tax revenue now. Tax authorities are looking to spend their time where they can harvest the most,” he observes.
Evaluating jurisdictions for crypto taxes
If you made money with crypto, then proactive planning regarding crypto taxation liabilities is likely to pay a worthwhile return no matter where you live. Some of these strategies like tax-loss harvesting or taking advantage of long-term capital gains may fall into the “try this at home” category, whereas more advanced methods like jurisdictional arbitrage may require one to venture from the home port and set up camp in a faraway land when it comes to personal tax residency. For those with serious capital, the setting up of an off-shore entity in a friendly jurisdiction may also be an option, albeit with many caveats.
In regard to personal taxation, it is rather objective to say that some countries are more advantageous than others from the perspective of a cryptocurrency investor.
The likes of the United Arab Emirates, Singapore, Switzerland and various Caribbean islands, including Puerto Rico, naturally get an A grade due to the near lack of tax liability. On the downside, these A-grade tax havens often come with considerable living costs.
Countries like Croatia, France, Austria, Poland, Italy and perhaps Germany rate highly, in the B range, due to the lack of taxation on crypto-to-crypto transactions or other workable solutions like discounts on long-term capital gains.
The U.S., U.K., Canada, Australia and much of Europe fall into the C category due to disadvantageous rules, variably including the taxation of crypto-to-crypto trades and swaps as well as restrictions on tax-loss harvesting.
India and, surprisingly, Estonia can be placed into the D category primarily due to the ineligibility of deducting investment losses from gains, thus making compliant trading particularly impractical. The F grade naturally goes to those countries that disallow the trading of crypto altogether, which we might interpret to mean a tax rate of 100%.
All of these ratings can of course change as new laws and practices are introduced. While higher and less permissive taxation may increase government income, they may similarly drive both brain drain and capital flight whereas the introduction of policies friendly to the digital asset industry can be expected to promote its growth within national borders. These are complex and politically charged issues for countries to consider.
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