The Most Crypto Friendly States in 2023
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Arizona, Florida, Wyoming, and Texas are considered crypto tax friendly states due to their favorable tax policies, exemptions, and incentives for crypto businesses, while states like California, Hawaii, and New York have high state taxes and regulations that may be less favorable for individuals and the crypto industry.
Puerto Rico's crypto tax policies offer significant advantages to crypto traders, particularly American citizens who want to mitigate their crypto taxes. Americans do not need a visa or passport to travel to Puerto Rico, and it is relatively easy to establish residency and/or relocate a corporation.
How is crypto taxed in 2023?
US taxpayers are required to report and pay federal taxes on cryptocurrency transactions that involve trading, selling, swapping, or otherwise disposing of crypto, resulting in either capital gains or losses. Income generated from activities such as mining, staking, and most yield farming is considered regular income and is subject to income taxes.
Purchasing crypto using fiat currency, gifting or donating crypto, and transferring crypto between wallets (without exchanging coins) are typically not considered taxable events.
Taxpayers outside of the US can refer to our helpful country guides for more information about crypto taxes in their region.
The most crypto friendly states in the US
Whether residing in the US or abroad, US citizens are subject to federal taxes on crypto transactions. Crypto tax consequences for individual taxpayers vary from state to state, particularly around capital gains taxes. Some states are also more appealing than others to the crypto industry because of varying cryptocurrency laws by state.
States that do not collect personal and/or corporate income tax, or tax at comparatively low rates, are naturally more appealing to investors or miners seeking to lower their tax liability. In what follows, we cover crypto tax friendly states that are attractive to both individuals US taxpayers and the crypto industry, including major crypto miners.
Arizona was the first state to declare that receiving an airdrop is exempt from state-level taxation. Note that airdrop rewards are considered taxable income at the federal level. As of 2023, Arizona imposes a flat state income tax of 2.5% and a corporate tax rate of 4.9%.
Recently, Colorado introduced a program that enables taxpayers to pay their state taxes with cryptocurrency. For the 2022 tax year (taxes filed in 2023), Colorado has a state income and corporate tax rate of 4.4%.
For individuals, Colorado applies a flat tax rate of 4.4% to taxable income based on the taxpayer's federal taxable income. However, specific state tax credits and Colorado's rules for income additions and subtractions can impact the final tax liability.
Florida has no state income tax and exempts crypto businesses from money transmission licenses. Florida has also launched a program allowing businesses to use cryptocurrency to pay state fees. As of 2022, the corporate income tax rate for Florida is 5.5%.
Kentucky has a flat personal income tax rate of 5%, which is fairly average among states. Its corporate tax rates range from 4-6%. Recent Kentucky legislation extended clean-energy focused tax breaks to miners who invest more than $1 million in equipment. Another bill introduced several other sales and excise tax breaks.
As in Florida, cryptocurrency businesses based in New Hampshire are exempted from the state's money transmission regulations. The state only imposes a 5% state income tax on interest and dividends, leaving capital gains untaxed. The New Hampshire corporate tax rate is 7.5%.
Texas has no personal income tax, competitive corporate franchise tax rates, and cheap electricity, so is appealing to Bitcoin miners. Because the state is eager to grow the crypto mining industry, it offers a 10-year tax abatement on its gross receipts tax, sales tax exemptions, and workforce training for major mining operations that set up shop in the Lone Star State.
Wyoming does not collect any personal or corporate income tax. The state has also worked to attract crypto traders and businesses by developing friendly regulatory frameworks for digital assets.
For example, Wyoming passed a charter for banks that deal primarily with digital assets. This made it possible for Kraken Bank to apply to establish itself in the state. Additionally, Wyoming is the first state to recognize a DAO as a legal entity, granting DAOs credibility and paving the way for clearer guidance about how DAOs would be taxed.
Wyoming also has a sales tax exemption for crypto mining equipment—provided the buyer has mined over $5 million of coins.
The worst states for crypto in the US
Unfortunately, some US states aren’t so crypto friendly, with hefty personal income and capital gains taxes and unfavorable regulation of the crypto industry.
That noted, crypto regulations are subject to change, and states can amend or introduce laws that may impact the industry landscape. When in doubt, our team of crypto tax experts at TokenTax are available to assist with your tax filing and any questions you have about specific rules in your state.
Here is a short list of the worst states for crypto in the US, based on regulations and how individuals are taxed.
California holds the distinction of having the highest state taxes in the country. Income is taxed between 1% and 13.3%, depending on the individual's tax bracket.
However, the leadership in California has displayed crypto-friendly gestures in recent years. In September 2022, Governor Gavin Newsom vetoed a proposal to introduce a regulatory framework similar to New York BitLicense.
For an extended period, the Hawaii Division of Financial Institutions enforced the requirement for companies involved in virtual assets to obtain a Money Transmitter License. One of the prerequisites for this license was the maintenance of fiat reserves supporting the value of all digital assets. Consequently, Coinbase ceased its operations in Hawaii back in 2017.
In recent years, Hawaii has implemented more crypto-friendly policies. The state initiated a pilot program known as the Digital Currency Innovation Lab (DCIL), enabling selected exchanges to operate without a Money Transmitter License.
Hawaii also imposes some of the highest state taxes nationwide. Income is subject to taxation ranging from 1.4% to 11%, while capital gains are taxed at a rate of 7.25%.
New York has mandated crypto businesses operating within the state to register for a BitLicense. This program has faced criticism due to its intrusive privacy policies and the associated license costs. Consequently, exchanges like Kraken have opted not to conduct operations in New York.
Furthermore, New York imposes some of the highest state taxes nationwide. Income is subject to taxation ranging from 4% to 10.9%, and if you are liable for New York City taxes, an additional 3.078% to 3.867% is applied.
The different cryptocurrency laws by state
States typically apply tax regulations to virtual currency transactions in a manner consistent with the approach taken by the IRS. Cryptocurrency is treated as property, similar to stocks or precious metals, rather than as money.
States that have not directly specified how they tax virtual currency typically follow the lead of the IRS regarding income and capital gains taxes. Legislation has been passed around the country pertaining to crypto taxation and industry, some more favorable than others. Here are three examples from Arizona, New York, and Wyoming:
Arizona enacted the "Arizona Blockchain and Smart Contract" law in 2017, recognizing the legal validity of blockchain technology and smart contracts. It aimed to foster innovation and promote the use of blockchain in various industries.
New York introduced the BitLicense in 2015, which is a licensing requirement for cryptocurrency-related businesses operating in the state. It imposes strict regulatory standards and reporting obligations.
Wyoming has been at the forefront of cryptocurrency regulation. It has enacted several laws, including the Wyoming Blockchain Task Force, the Digital Asset Banking Law, and the Utility Token Act, which aim to create a favorable environment for blockchain and cryptocurrency businesses.
Crypto holders should refer to their state tax agency for current information about their region and, when in doubt, work with a crypto tax expert like our team at TokenTax.
Personal state income taxes and crypto
States without a personal income tax are generally favorable to individual crypto investors and can be considered crypto friendly states. As of 2023, eight states do not levy a state income tax on individuals. They are: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire does not tax earned income but imposes a 4% tax on dividends and interest.
Notably, the majority of states apply the same tax rate to both investment income (capital gains) and income derived from work. However, there are nine states—Arizona, Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin—that levy taxes on long-term capital gains at a rate lower than ordinary income.
Corporate state income taxes and crypto
Forty-four states and the District of Columbia impose a corporate income tax, with rates varying from 2.5% in North Carolina to 12% in Iowa. In contrast, four states—Nevada, Ohio, Texas, and Washington—opt for a "gross receipts tax" based on sales and receipts rather than a corporate income tax. Delaware, Pennsylvania, Virginia, and West Virginia levy both corporate income and gross receipts taxes.
South Dakota and Wyoming stand as the sole states that do not impose either a corporate income tax or a gross receipts tax.
Why is Puerto Rico so attractive for crypto taxes?
Puerto Rico has become a popular destination for US taxpayers seeking to lower their taxes. Because Puerto Rico is an unincorporated US territory, Americans do not need a visa or passport to travel there, and it is relatively easy to establish residency and/or move a corporation.
Puerto Rico's crypto tax policies offer significant advantages to crypto traders, especially American citizens seeking ways to mitigate their crypto taxes. Notably, the US (with Eritrea) is just one of only two countries that impose global taxation on its citizens.
So short of renouncing American citizenship and relocating to one of the few crypto tax free countries or territories, Puerto Rico presents a viable alternative for American crypto enthusiasts aiming to decrease their tax obligations over the long term.
That noted, Americans tempted to relocate to Puerto Rico for tax reasons must know that any existing holds will be subject to the usual IRS taxes if disposed of while residing in Puerto Rico. This is to say, any holdings acquired prior to your move to Puerto Rico will be subject to the usual federal taxes.
Why is Puerto Rico appealing to American crypto holders?
If someone becomes a bona fide Puerto Rico resident, they can receive considerable tax breaks: individuals pay no capital gains taxes and business-to-business service companies pay just a 4% federal income tax (compared to 21% in the states), among other incentives.
Because of the huge tax breaks on the line, the IRS highly scrutinizes crypto investors who claim to have established residency in Puerto Rico.
Prospective residents must file Form 8898 to update their residency and meet the following criteria:
Be present in Puerto Rico for a significant amount of time.
Have their “tax home” in Puerto Rico.
Have “closer connections” to Puerto Rico than any other location.
The last of these is the most challenging to prove, but essentially the IRS will look for proof that you legitimately live in Puerto Rico and participate in its society.
The IRS evaluates this through many of the criteria listed in the previous section. Puerto Rico also requires those taking advantage of these tax breaks to donate $10,000 to charity per year.
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Frequently asked questions about crypto friendly states
Here are answers to frequently asked questions about the most crypto friendly states and cryptocurrency laws by state.
In which states can I buy cryptocurrency?
You can purchase cryptocurrency in any US state or territory, without restriction.
What state is the most crypto friendly?
While technically not a state, Puerto Rico wins out as the friendliest region in the United States for crypto. Florida, Texas, and Wyoming are all crypto friendly states with favorable tax laws for individuals and corporations.
What states have no crypto tax?
As of 2023, eight states do not levy a state income tax and can be considered crypto friendly states for individual taxpayers. They are:
New Hampshire does not tax earned income but imposes a 4% tax on dividends and interest.
Do I have to pay taxes if I have cryptocurrency?
Simply purchasing and holding cryptocurrency is not a taxable event for US taxpayers. When you trade your crypto for another crypto, dispose of it for fiat, or use your crypto to make a purchase, this is a taxable event.
Where should I move to avoid crypto tax?
US citizens must pay federal taxes wherever they reside globally, although Puerto Rico can be an attractive choice. International taxpayers have a number of options for crypto tax free countries and regions with favorable crypto tax laws, including Germany, Hong Kong, and Singapore.
Is Florida crypto friendly?
Florida is among the more crypto friendly states in the US. At time of writing, Florida has no state income tax and has programs that allow businesses to use crypto to pay state fees.
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Last reviewed by Zac McClure,MBA on November 15, 2023 · Sources