Crypto has become a multi-trillion-dollar asset class over the past decade, spanning cryptocurrencies, decentralized finance (DeFi), and non-fungible tokens (NFT). While crypto taxes and regulations remain vague in the United States, many countries have sought to attract crypto businesses and investors with lower taxes and clearer laws.
Let's look at what makes a country crypto-friendly and five examples of countries catering to the industry.
Crypto-friendly countries have clear regulations, low tax rates, and a supportive government. Here are five of today's best jurisdictions.
What Makes a Country Crypto-Friendly?
Crypto has become a multi-trillion-dollar asset class that’s impossible for countries to ignore. While the U.S. has ambiguous tax and securities laws, other countries have provided clear guidance and special incentives to cryptocurrency investors, professional traders, and blockchain businesses to draw them onto their shores.
Three areas influence crypto-friendliness:
- There's no legal ambiguity – Crypto-friendly countries have clear regulations for both individuals and businesses involved in crypto. And, of course, these regulations evolve along with the industry as new innovations come to market.
- There are low or no crypto taxes – Low tax rates are a surefire way to attract wealthy individuals and businesses, so it’s not surprising that many crypto-friendly countries have eliminated crypto taxes and incentivized businesses.
- The government is supportive – Some governments are hostile to cryptocurrencies and may even ban them. In contrast, crypto-friendly countries adopt policies to support the industry and may look into using blockchain tech in government.
Of course, the decision to move to a new country or establish a business on foreign shores depends on more than just laws and taxes. For instance, crypto exchanges that need bank partnerships to onboard fiat currencies may need to be in jurisdictions with strong “know your customer” laws. As a result, individuals and businesses must look at the whole picture.
Portugal has become one of the most crypto-friendly jurisdictions in the world, with tax-free transactions and incentives for businesses.
The country treats cryptocurrencies as a form of payment rather than an asset, which means that crypto transactions are exempt from value-added tax (VAT). However, businesses and professional traders must pay capital gains taxes on any appreciation. The amount of tax ranges from 28% to 35%, depending on your profits and other factors.
In addition to tax-free crypto transactions, Portugal's Digital Transitional Action Plan includes the creation of Technological Free Zones to encourage blockchain and cryptocurrency experimentation. Crypto investors can also take advantage of the country's Golden Visa program to obtain residency without the high bar of many other countries.
Switzerland has always been well-known as a financial center and aims to remain central in the crypto world.
The country doesn't tax capital gains from private wealth assets as a general rule. These same rules apply to crypto transactions. However, business wealth from professional trading doesn't count as private wealth and may be subject to tax. Taxpayers may also need to pay a wealth tax on their overall assets, which varies based on their circumstances.
In addition to its tax benefits, Switzerland has clear regulations in place for crypto businesses. For example, the 2020 Blockchain Act defines the legalities of running a cryptocurrency exchange and defines initial coin offerings and money laundering prevention rules. In fact, the country is home to the Crypto Valley, with over 900 domiciled businesses.
#3. Puerto Rico
Puerto Rico has seen an influx of crypto-driven wealth over the past few years – so much so that locals say it’s causing a real estate bubble.
The territory’s “resident investor” incentive, known as Act 22, enables wealthy individuals that become residents to pay zero tax on capital gains, dividends, and interest. In addition, those taking advantage of other incentives can pay tax rates as low as 4% on income. Under the rules, beneficiaries must buy a house and donate $10,000 per year to local charities to qualify.
The catch is that your crypto gains up until the date you enter Puerto Rico are subject to U.S. capital gains taxes. As a result, existing crypto millionaires wouldn’t necessarily benefit by moving to the territory, but it could be compelling for those that speculate with cryptocurrencies and hope to make even more profits over the long run.
Bermuda is a well-known tourist destination for its gorgeous beaches, but it's quickly become just as well known for its crypto-friendly environment.
The country doesn't charge any tax on income or capital gains, meaning that crypto transactions are tax-free for individuals. Since there are no limitations, it's potentially better than Germany or Switzerland, where some taxes may apply after a certain threshold. However, it's on par with other tax-haven islands, like the Cayman Islands or the British Virgin Islands.
From a business standpoint, the island has attracted many crypto businesses into its jurisdiction over the years, including Gemini, Bittrex, and Circle, thanks to its comprehensive regulation. The 2019 Digital Asset Business Act lays out clear rules, leaving little room for ambiguity and giving businesses more confidence than in other parts of the world.
Malta has become known as "blockchain island" and is home to Binance, the largest crypto exchange in the world.
The country doesn't charge any income or capital gains taxes on foreigners' assets from out of the country. And unlike other countries, these tax benefits extend to overseas companies, which pay an effective income tax rate of just 5% if they're non-domiciled. As an EU member, it's an attractive way for fiat onboarding at a low tax rate.
As with other top crypto destinations, the island also has clear laws defining crypto regulations. For example, the Virtual Financial Assets Act legally defines cryptocurrencies; the Innovative Technology Arrangements and Services Act provides voluntary regulatory systems, and the Malta Digital Innovation Authority Act sets up an oversight authority.
The Bottom Line
The multi-trillion-dollar crypto industry has caught the eye of several countries looking to become go-to destinations for investors and businesses. However, while these five countries have the best current regulations, many others compete to attract the industry within their borders, opening the door to more tax benefits and incentives.
If you trade crypto assets in the U.S., ZenLedger can help you keep everything organized for tax time. Our platform aggregates transactions across wallets and exchanges, computes your capital gains and losses, and auto-fills popular IRS forms. You can even find opportunities to harvest tax losses and reduce your year end tax bill.