Cryptocurrencies and taxes: our pro tips
How to benefit from CRYPTO-FRIENDLY regulations and nomadic lifestyle?

Bitcoin has just made a new ATH (the highest value of all time). This is a great opportunity to talk about the tax on profits from crypto.

It has been already 13 years (sic!) since the concept of cryptocurrencies was developed. However, most of the governments still have not implemented any specific legislation towards defining crypto assets – not even mentioning tax regulations. Each country treats profits from crypto in a different way. How to benefit from it and what are the best options to save on taxes on crypto?

▶ Switching from personal level to holding crypto through a company

If you choose a right jurisdiction for registering your company, you can minimise the tax in a smart way.

  • In many countries the corporate tax rate will be lower than the taxation on a personal level. In general: setting up a separate entity is usually more beneficial for freelancers, also in case of crypto.  
  • This brings less cost on social security and pension contributions.
  •  On another note, separating any assets from a physical person is less risky and is a great option for reinvesting your cryptocurrencies.

Obviously, injecting your crypto into an entity, would only make sense in some specific jurisdiction. When choosing a place for incorporation, we should first check:

  1. how the country defines the cryptocurrency, and
  2. how profits coming from the sale/conversion are taxed there.

There are countries where cryptocurrencies are treated as assets subject to capital gains tax. In Israel, which characterized crypto as a tradeable asset, the profits are taxed by 25% rate. When some other consider them just as a currency. The so called “crypto friendly” jurisdictions have 0% tax rate on crypto profits. Or in general have a zero or low capital gain tax on the gains arising from crypto investments.

Some governments came up with more reliefs. For example, thy don’t subject the sale and purchase of cryptocurrencies to VAT (Georgia). Other introduced a clear and straight forward regulation for obtaining a virtual currency service provider license (Estonia).

How about countries that still have not regulated the definition and taxation of cryptos? 

In Cyprus we are still waiting for a relevant legislation or at least some guidance. The Tax Office in Cyprus is not willing to issue interpretations in this matter. In practice, the applications for tax rulings are left without an answer. Since every Cyprus company needs to submit its financial statements, the role of auditors in qualification of such profits is significant. An auditor might classify crypto profits in a company as corporate income tax (12,5% applies), but if he treats them like capital gains tax, it means no tax – in Cyprus they are taxed with 0% rate.

The only body that reffers to the subject is  Cyprus Securities and Exchange Commission (CySec), which updated its policy of regulation of crypto assets. The CySec document defines specific requirements for companies that seek to be included in the official register of service providers related to cryptocurrencies. At the same time it describes crypto assets – but only these that are regulated… which in practice is not the case yet.  Depending on their structure, crypto assets can be qualified as financial instruments. Also, without being an official means of payment, they can qualify as “electronic money”. Time will show how tax authorities in Cyprus will classify it.

To sum up: moving your cryptocurrency to an entity can be a very smart move. Even in countries without specific legislation, the taxation of profits on corporate level can be more beneficial than declaring crypto profits as a physical person.

▶ Changing your tax residency

If you are location independent, you can consider changing your tax residency to a country with crypto friendly regulations. Even if you prefer to be taxed on personal level, you can become a tax resident in a country which provides low or 0% tax rate on profits from cryptocurrencies.

Crypto-friendly residencies

The best example here is Georgia: income received by an individual through the cryptocurrencies exchange is exempt from income tax. The VAT is 0% – selling cryptocurrency (exchanging it into Georgian or other national currencies) is not taxable by VAT (applies to both corporations and individuals).

Portugal became also a popular destination for digital nomads–foreign citizens who establish tax residence there can apply for the very beneficial Non-Habitual Residency Status. However, the crypto incentives (no income or capital gains tax and VAT either) relate there only to individuals.

Malta has been actively promoting itself as the country with the highest acceptance of cryptocurrencies as a means of transactions. In case your cryptocurrency investment is not a day-to-day trading of crypto, your transactions can be tax free there (long-term capital gains taxes and VAT do not apply).

We referred before to the typical incentives – like zero or low taxes on crypto trades or no VAT. Another important factor is the ease of paying and reinvesting directly in crypto – for example when buying a property. We should also investigate taxation of dividends distribution (paying out profits from your company), which can be with low or 0% rate. When searching for a holistic solution for your structure, you could combine both – incorporation of an entity with establishing your personal tax residency in the same jurisdiction. But this will not always be the case. You can have a tax residence in a different country after making sure that the final distribution of profits will not be subject to a high tax

It is definietely worth to plan some smart moves before cashing out or reinvesting your cryptocurrencies. The governments still have not caught up with the new reality. But sooner o later, they will be introducing or adjusting their rulings for cryptocurrency investors and traders.

Ideally, the crypto entusiasts should wisely use the incentives of the exisitng tax regimes and the perks of the nomadic lifestyle.