What are the most crypto friendly states in the US? Are you looking to move to a different state and find the most crypto tax friendly location?
The shift in Bitcoin reporting happens quickly, and state policies can differ considerably in the US. The American tax code for crypto is one of the most developed worldwide, but that comes at a cost for traders and businesses.
Its advanced tax regime covers almost all crypto operations and quickly adapts to the novelties in the sector, but state regulations can turn crypto taxes into a more difficult scenario without the help of a crypto tax software.
On the other hand, some states are using crypto as a differentiator, attracting businesses, and offering advantages for individuals wanting to embrace the decentralized revolution.
Come find out which are the top crypto friendly states in the US.
What are the most crypto friendly states?
Wyoming, Nevada, and Texas are the most crypto friendly states in the US, considering recently implemented measures to attract crypto traders and businesses. Let’s look further into each one of them.
The most Bitcoin friendly state: Wyoming
Wyoming has become the Bitcoin capital of the US, with the state developing frameworks to bolster the local economy by attracting crypto businesses and traders. For example, a recent framework will allow crypto native banks to deal with digital assets with more freedom under current financial rules.
Recently, Wyoming became the first state in the US to adopt an entirely new legal framework for Decentralized Autonomous Organizations (DAOs). DAOs can now be legal entities in the state for the first time in the US.
The state wants to attract more crypto investors and companies from tech hubs such as San Francisco, developing favorable regulations for those moving. Beyond its crypto initiatives, Wyoming is a state with no income state taxes – there is no Bitcoin state tax in Wyoming.
This approach can be very beneficial for crypto investors, making it one of the most crypto friendly states in the US.
One of the most crypto friendly states: Nevada
In 2017, a law was passed in Nevada to not tax Blockchain or smart contracts while recognizing the validity of Blockchain to validate records.
The state of Nevada is an early adopter of Bitcoin and Blockchain technologies, with plans to attract more crypto businesses and investors to the state. Recently, private entities want to make Nevada a crypto “smart city” while the state governor is exploring the concept of creating “innovation zones,” attracting more companies and investment.
Nevada also does not have state income taxes, making it one of the most crypto friendly states.
Is Texas crypto friendly?
Texas is becoming a hotspot for Bitcoin mining amid the Chinese crackdown on crypto miners in the country. Entrepreneurs are setting up operations in Texas and integrating with the local electricity grid while remaining green-energy focused.
Additionally, Texas is also a state with no state income tax, allowing crypto traders with high incomes to reduce their crypto tax bills.
How is crypto taxed in the US?
Cryptocurrency is taxed everywhere in the United States. Even though state taxes can differ and impact your total tax bill, you still will be taxed at the federal level, regardless of your state.
We’ve put together the 2021 guide on crypto taxes in the US, comprising the majority of taxable events you’ll encounter. For example, crypto-to-crypto or crypto-to-FIAT trades are taxable events in the US, leading to capital gains taxes.
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Moreover, when you purchase a product/service with a crypto debit card or directly with crypto, you’ll also face capital gain taxes.
How do I avoid capital gains tax on crypto?
There are benefits for long-term investors in the US, reducing your capital gains tax rate if you hold your crypto for more than 12 months. If you qualify for long-term capital gain treatment, you can expect a tax rate between 0% to 20%. If you end up selling before holding for 12 months, you’ll face a short-term capital gains tax rate, ranging from 10% to 37%.
Please keep in mind that every time you earn interest, receive crypto staking rewards, get paid in Bitcoin, or get a free airdrop, you’ll have to pay income taxes. Check out this guide on how to report your crypto on taxes.
Crypto Tax simulation: Living in California vs Texas.
Let’s see the difference in paying taxes if you cash out your crypto holdings after changing your fiscal residence from California to a more crypto-tax-friendly state like Texas.
1. John buys Cardano at $1.
In April 2020, John invested $10,000 in Cardano when it was 1$/coin. At that time, John lived in Los Angeles, California.
2. John moves to Texas.
Amid the rapid increase in the cost of living and a job opportunity, John moves to Texas in late 2021. His fiscal residency is now in Austin, Texas. He makes $70K a year from his new job, and he hasn’t made any additional crypto investment.
3. John sells his Cardano investment and pays capital gains.
In September 2022, John decided to sell his position when Cardano hit $3. John sells it for $30,000, incurring a profit of $20,000. Since John is selling after holding for more than 12 months, he’ll qualify for a common 20%* long-term capital gain tax rate. In this scenario, John would need to pay $4,000 in capital gains tax ($20,000×20%).
Since the sale occurs when John is already living in Texas (fiscal residency), a state with no state taxes, John won’t need to pay any state taxes.
However, John will have to pay federal income taxes on his salary and other income, in addition to his crypto taxes.
*John’s capital gains tax rate will depend on many other factors. The 20% rate is only assumed for simplicity in the calculations, based on a hypothetical scenario.
4. John would need to pay more taxes if he was in California.
Do you pay state taxes in California on crypto? In California, state taxes can range from 1% to 13.3%, depending on your income bracket. The state income taxes also apply to capital gains.
If John was still living in California, he would need to pay an additional state tax on the capital gains of $20,000 and his other income. Considering the state tax rates in California and adding up John’s yearly salary, he would be subject to a 9.3% tax rate (for a single filer).
Moving states can save John some money by the end of the year. Later in this article, we’ll cover some more ways you can use to reduce your taxes. You can also find more crypto tax tips in our 7 trends for crypto in 2021 report, available for free.
Where is crypto not taxed?
Currently, Malta offers tax benefits, while Portugal is tax-free if you are not a professional trader or do not run a crypto business.
Please keep in mind that the tax regimes are quickly evolving, and countries offering crypto tax benefits can use other tax regimes (e.g., US and UK) to adapt their regulations and impose taxation rules.
What is the most crypto friendly country?
If you’re looking for crypto tax free countries in 2021, you’ll have difficulties finding them as governments increase their taxation on crypto. However, our guide of the top 5 crypto-tax friendly countries in the world can help you.
As stated above, Malta and Portugal can be interesting alternatives. If you’re coming from the US, Puerto Rico may be the most direct solution. If you move (and your assets) to Puerto Rico, you may enjoy a 0% capital gains tax and a 4% income tax rate. But a move to Puerto Rico entails a lot of moving costs, investment requirements, life, and tax changes.
Unless you’re a crypto whale, it may not be beneficial to consider such a radical move due to all the expenses. If you are still considering moving, finding a crypto-friendly state in the US may be your best option.
CoinTracking covers tax reports for nearly all countries, and we provide special capital gains calculations for some countries (e.g., HMRC guidelines for the UK, ACB for Canada, FIFO/HIFO/LIFO).
How to pay less crypto taxes?
Are you looking for other ways to reduce crypto taxes?
The US is not alone in offering tax benefits for long-term investors. Similar laws exist in Germany and other countries, getting you tax-free coins or a tax-reduced tax rate. Generally, you need to hold your crypto for longer than 12 months to become eligible for those benefits.
On top of holding your crypto, you can consider crypto tax-loss harvesting or donating crypto to charitable organizations. You’ll find more ways to reduce your crypto taxes in our recent crypto tax guide.