Capital gains tax can wipe out potential profits for crypto-investors. However, there are certain places where capital gains from crypto-trading can be greatly reduced or even completely avoided. These places are called tax havens and they exist all around the world due to different government laws based on the classification of cryptocurrencies.
The following countries have lowered capital gains tax compared to the United States:
Peru: Offers a recently lowered capital gains tax rate of 5%. This rate applies to residents of Peru and foreigners in Peru.
France: Since April of 2018, France has offered a capital gains rate of 19%. However, the French government also charges a social charge, which is normally 17.2%. More information on French social charges can be found here.
The following countries offer no capital gains tax:
Belarus: Currently, has no capital gains tax on cryptocurrencies until 2023.
Germany: 0% tax on capital gains from cryptocurrencies if held for more than a year.
Malta: 0% capital gains tax from cryptocurrency. Malta is an established tax haven and a ember of the European Union
Panama: Currently offers 0% tax on cryptocurrency capital gains and other forms of capital gains. Panama also offers easy opportunities to obtain permanent residency. Another bonus is Panama’s strict confidentiality laws and regulations that apply to the documentation of offshore corporations, trusts and foundations.
Puerto Rico: Puerto Rico offers an interesting case because of its status with the United States. Because Puerto Rico is a U.S. territory, but not a state within the U.S., it can have separate laws applying to taxation.
Act 22 is a tax incentive for individual investors in Puerto Rico. Act 22 eliminates all taxes on interest, dividends and capital gains. So, If you move to Puerto Rico, become a permanent resident and earn a lot of money on trading cryptocurrencies, you do not have to pay capital gains tax from Puerto Rico or the United States. Permanent residents in Puerto Rico do not file tax returns in the United States. This means no IRS, no accountants, and no worries. Instead, they pay income tax to the Puerto Rican government, however with the Act 22 capital gains tax is not collected by the Puerto Rican government. This is the current case, but in 2035 Act 22 is set to expire. all residents of Puerto Rico are still required to pay Social Security and Medicare taxes to the United States Government. Act 22 of Puerto Rico only eliminates taxes on interest, dividends and capital gains.
The following chart shows the process of becoming a “Bona Fide” resident of Puerto Rico. This would allow for Act 22 to take effect and eliminate capital gains taxes.
Portugal: Portugal has a 0% capital gains tax rate on cryptocurrency gains, unless it is considered your full-time income.
Singapore: Offers a 0% capital gains tax on everything, including gains from cryptocurrencies.
Switzerland: Switzerland does not tax capital gains on the federal level.
Turkey: Has 0% capital gains tax on sales held longer than 2 years. This is most likely not an effective option for crypto-traders.
Bermuda and the Cayman Islands
Bermuda and the Cayman Islands are common tax haven destinations for United States citizens. Both Bermuda and the Cayman Islands have no corporate or income taxes on money earned outside the territory. However, tax laws within the United States have cracked down on offshore accounts and require the tax owed to the United States government be paid. For these reasons, Bermuda and the Cayman Islands do not offer the best opportunities for tax havens.
Any United States Citizen must pay income taxes to the United States government, even if the individual does not live full-time in the United States. There are tax discounts individuals can receive, if one is living full-time in another country. The only way to avoid paying taxes to the United States government is to revoke one’s citizenship. The United States has very strict rules for offshore account reporting and failure to disclose foreign bank or securities accounts can cause problems for the IRS. Once individuals have established legal offshore financial accounts, hiring the best tax experts to prepare your income tax return is essential. The annual cost of specialty tax work can be substantial, making it not cost-effective for most cryptocurrency traders.