Where Are the Best Tax Residence Locations For A Crypto Investor?

As Crypto Becomes More Mainstream, Knowing Its Tax Implications Are Becoming Increasingly Important

As of late 2024, the state of cryptocurrency is dynamic and evolving, influenced by a combination of regulatory developments, technological innovations, and market trends. The results of the U.S. election in November 2024 caused a surge in the prices of crypto and attracted many new investors to the scene. As the crypto market continues to evolve, it is important for investors to understand the tax implications of their gain from crypto and how their place of tax residence will play into that.

Your gain from crypto will be taxed drastically differently depending on your place of tax residence since, of course, every country has its own taxation rules. A recent crypto tax report published by blockpit.io shed some light on the different tax treatments of crypto gains depending on the country. The various tax policies surrounding crypto make some countries an extremely attractive candidate for crypto investors and crypto tax planning strategies, while other counties are less attractive options. The report provides a general overview of taxation policies across countries as of August 2024, and provides insights regarding their attractiveness to crypto investors.   

Countries With The Highest Crypto Tax Rates

Denmark imposes one of the highest personal tax rates on cryptocurrency worldwide. The Danish Tax Agency taxes up to 53% of both long-term and short-term capital gains from cryptocurrency. These gains are treated as personal income, meaning they are subject to the same progressive tax rates as other forms of earnings. Other countries that impose high rates of tax on crypto gains include Ireland and Iceland. These counties have high tax rates on both short- and long-term crypto holdings relative to other counties. This is in line with their commitment to social welfare programs, especially in the Nordic countries.

European Countries Have Mixed Tax Rates On Crypto Gains

European countries offer differential taxation of crypto depending on whether the crypto is traded short term or held long term. Generally, long-term holdings will attract the most favourable tax treatment in these countries. In Germany, long-term cryptocurrency holdings are taxed at 0%, offering substantial tax benefits.

While short-term gains are taxed up to 45% if assets are sold within one year, profits are tax-free if the crypto is held for more than a year before selling or if the profit is below €1,000, starting in 2024. Additionally, cryptocurrency income is exempt from tax if it is below the €256 exemption limit. Similarly, in Luxembourg, long-term capital gains from cryptocurrency are taxed at 0% if the assets are held for over six months. Assets sold in under six months' time will be considered short-term gains and will attract a 42% progressive income tax rate. Belgium also offers a 0% tax rate on long-term crypto gains, but the caveat here is that the crypto trading transactions must be considered part of the normal management of private assets in order to qualify for favourable tax treatment.

In Malta, a different caveat applies, where long-term crypto holdings are taxed at 0% only if they are held as an investment rather than being considered trading activity (short-term trades) or part of a business. Taxpayers should be mindful of the differential treatment of crypto gains in European countries as the treatment of crypto gains can have unexpected results depending on how long it is held and the policies of the country.

Canada's Tax Treatment of Crypto Gains

Disposing of crypto, such as selling it, trading it for another crypto, or using it for purchases, triggers capital gains tax in Canada or is taxed as business or property income. In Canada, 50% of capital gains are taxable, and 50% of capital losses can be used to offset these capital gains.

Depending on the frequency of trading and the intention of the trader, trading activities may be taxed as ordinary income. Once you have a taxable capital gain, it is taxed at your marginal tax rate. The rate depends on your total taxable income and the province or territory in which you live.

Where Is The Best Place For a Crypto Investor To Be To Keep The Profits?

When it comes to crypto tax-haven locations, there are many players in the game. Several locations allow individual crypto investors to keep the entirety of their crypto profits, as they levy no tax on cryptocurrency gains. These countries include Bahrain, Barbados, Bermuda, the Cayman Islands, Hong Kong, Malaysia, Singapore, and the United Arab Emirates. Notably, Bermuda has adopted bitcoin as legal tender as of 2021 in order to attract crypto investment and stimulate economic growth. These locations offer attractive tax rates for crypto investors and potential high-value tax planning opportunities. If you would like to explore your tax planning options, consult with one of our top Canadian crypto tax lawyers for advice.

Pro Tax tip: Crypto Gains Are Realized Even On Token Swaps

In Canada, like traditional forms of capital assets, an unrealized gain from crypto crystalizes when the asset is sold. However, this does not mean that the gain only crystalizes when the crypto is ultimately exchanged for a fiat currency. It means that the gain potentially crystalizes when one coin is swapped for another.

Therefore, after the swap, even if the new crypto coin is simply held, there may still be a capital gains tax payable on the swap. The fair market value of the coins on the day of the swap will determine the amount of capital gains tax payable. It is crucial to keep extensive documentation of all trades to avoid issues in the future. If you need guidance on how to calculate your crypto gains, consult with one of our top Canadian crypto tax lawyers.

FAQ

I now realize that I have unpaid taxes for my crypto gains. What do I do?

If you have unreported crypto gains, the best course of action is to file a voluntary disclosure. Voluntary disclosure applications have significant potential upsides, including penalty and interest relief. It is always better to file a voluntary disclosure application sooner rather than later, as CRA actions jeopardize your eligibility for the program. If you would like to file an application to the Voluntary Disclosures Program, our expert Canadian tax lawyers would be happy to assist you.

Can I deduct cryptocurrency losses?

Yes, you can typically deduct cryptocurrency losses just like you would with other capital losses. If you sell crypto at a loss, you can use that loss to offset other capital gains or, in some cases, offset ordinary income if the crypto gains qualify as business income. The ordinary rules on capital losses apply, so losses may be carried back 3 years and carried forward indefinitely. This means that capital losses can be used to offset capital gains from the previous 3 years, so a taxpayer may receive a refund for taxes paid in those years.

I am thinking of becoming a digital nomad and leaving Canada for a low-tax crypto destination. What are the tax considerations?

You must ensure that you sever significant ties with Canada in order to cease your Canadian tax residence. Tax residence is not automatically severed by moving or gaining citizenship in another country, and there can be numerous factors that need to be taken into consideration when assessing tax residence. If you are a digital nomad and cease your Canadian tax residence, you will still be taxed on your Canadian-sourced income. If you remain a Canadian tax resident, you will be taxed on your worldwide income, and a tax treaty may be applicable to give you tax credits to avoid double taxation. Severing and establishing a new tax residence could be complicated depending on the circumstances underlying one's situation. It is advisable to contact an expert Canadian tax lawyer for assistance on the matter to ensure it is done properly.

When a Canadian resident leaves Canada and becomes a non-resident, he or she may be subject to a "departure tax," which is essentially a tax on the unrealized capital gains of their property. This tax is not a fee you pay just for leaving, but rather an assessment of the increase in value of certain assets you own up to the point of departure. The Canadian government treats this as a deemed sale of assets when you leave the country.

How it works:

• When you leave Canada, you are considered to have disposed of most of your assets for tax purposes, even if you haven't actually sold them. This is a "deemed disposition."
• You must pay tax on the capital gains that have accrued on those assets up until the date you depart.
• Common assets subject to departure tax include real estate, investment property, and crypto assets.

DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.