So you’ve struck it rich in crypto? You’ll want to head to one of these countries to keep your newfound wealth.
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, its 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. Herv 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. Theres 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 drivers 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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cointelegraph.com