Tax-free crypto countries: Do they exist?
While it might be a dream to have bitcoin earning profits tax-free in lands far away, that's more fantasy than reality.
One challenge moving forward for governments is the legal standing of cryptocurrencies. The question of the legal standing is what drives the belief that there are tax-free crypto countries.
In short, it is not completely correct to say that tax-free crypto countries exist. However, there are some that have legal definitions of cryptocurrencies that allow a more relaxed approach to their use in society and their taxation as a source of revenue.
Countries with strict regulations surrounding cryptocurrencies
China has defined cryptocurrencies and tokens issued as part of initial coin offerings (ICO) to be securities for purposes of legal standing. This has led the Chinese government to ban all ICO activities in China until such a time as the market can be regulated correctly.
This is the official line but the reality is that China is a nation that suffers chronically from capital flight problems. That means that Chinese yuan flowing into ICOs could lead to money exiting the country and placing more strain on the Chinese economy. With this in mind, it becomes clear why cryptocurrencies are so heavily regulated in China.
Not far behind China, the United States (US) is in the process of gradually tightening up its legal position towards cryptocurrencies which are defined as securities. As the world’s reserve currency, the US benefits from international trade with most other countries on Earth transacting in the US dollar.
It is suspected that as the rise of cryptocurrencies continues, the amount of trade conducted in US dollars may decline. For that reason, it is in US interests to stop or at least slow down the huge growth in unregulated cryptocurrencies like bitcoin and other privacy focussed cryptocurrencies. In this light, it is understandable why the US Senate has made moves to criminalise non-disclosure of cryptocurrency assets.
Morocco, a devout Muslim country, has banned cryptocurrencies outright making it far from being a haven for cryptocurrency traders. Likewise, Egypt’s highest religious authority recently issued a powerful decree called a fatwa declaring cryptocurrency to be against Islamic principles.
The United Kingdom recognises cryptocurrencies as a foreign currency and the official government position is still unclear, preferring a case-by-case basis for dealing with the issue. Having said that, crown possessions like Gibraltar or the Isle of Man are actively seeking to engage cryptocurrency and blockchain-based companies.
These corporations are offered preferential tax discounts for basing operations there but cryptocurrency profits will still be taxed. The legal definition of their tax status is applicable to capital gains tax.
Countries allowing bitcoin but taxed as capital gains
It has been reported that Germany is a cryptocurrency tax-free country. This is almost correct. Cryptocurrencies are considered to be a form of currency that can be used for the purposes of private sale.
The exciting part is that, if held for over a year, cryptocurrencies and profits from them are tax-free. Speculative traders, whose transactions often last very short time spans, are taxed at a rate of 28% as a form of capital gains tax on profits from their cryptocurrencies.
Japan has similar legal understandings of cryptocurrencies to Germany. Cryptocurrencies are considered to be a form of payments but not legal tender. While cryptocurrency payments within the Japanese economy are increasing, that income and any profit from the increase in the value of the cryptocurrency are both taxed and the profit from cryptocurrency appreciation is eligible for capital gains tax.
Another country worth a mention here is the Czech Republic which seems to attract considerable technical capital towards its developing blockchain industry. For example, Trezos, the leading manufacturer of cryptocurrency wallets, is based in the Czech Republic. This is not because cryptocurrencies are exempt from capital gains tax but because the system of taxation seems better with a flat rate of tax at 10% for businesses and 15% for individuals.
Cryptocurrency (almost) tax-free countries
Bulgaria and Slovenia apply no capital gains tax to profits accrued from the rise in value of cryptocurrency assets, though whether this will be true in the future is unclear. As it stands, the cryptocurrencies must be traded on regulated exchanges within the EU regulatory framework to be eligible for exemption from capital gains tax. In addition, Slovenia actively taxes income derived from mining cryptocurrencies.
Belarus is a country that has liberalised the trading of cryptocurrencies and in December 2017 declared that profits from trading cryptocurrency will be exempt from capital gains tax over the next five years.
Singapore and South Africa have not yet developed a legal standing for cryptocurrencies and as a result both are completely free from capital gains tax.
Denmark has previously considered bitcoin to not be a currency and therefore was not assessed as capital gains. That seems to be changing since December 2017 as the tax authority has been asked to issue their position on existing regulations.
Essentially most countries consider cryptocurrencies to be in one of three categories. One, as a form of currency and taxable, two, as a security and taxable, or three, not a currency and not taxable. The countries that have declared cryptocurrencies a form of currency but give it tax exempt status will still have the option to assess cryptocurrencies as eligible for taxation in the future.
What appears to be happening is that many nations are moving to enact their own national blockchain-based cryptocurrencies much like Venezuela has done recently. As for bitcoin, what happens once national cryptocurrencies are widespread is anyone’s guess. What should be clear to most is that privacy focussed coins will trade at a premium in that global marketplace.