No matter where you live in the United States, you’ll owe federal tax on your crypto transactions. However, because states also levy taxes, there are locales that are more crypto-friendly than others. In what follows, we’ll go over the states that are most attractive when it comes to crypto taxation, particularly for mining operations.
Of course, any state that doesn’t collect personal and/or corporate income tax will be attractive to investors or miners seeking to lower their tax liability. However, three states have stood out for actively recruiting crypto businesses with preferential tax treatment.
Most Crypto-Friendly States
Wyoming doesn’t collect any personal or corporate income tax, but beyond that, it’s also working to attract crypto traders and businesses by developing friendly regulatory frameworks for digital assets. For example, it has passed a charter for banks that deal primarily with digital assets. This made it possible for Kraken Bank 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 mining equipment—provided the buyer has mined over $5 million of coins.
Kentucky has a flat personal income tax rate of 5%, which is fairly average among states. Its business tax rates range from 4-6%. However, Governor Andy Beshear would like to attract more bitcoin miners to the energy-rich state with an ailing coal industry.
Recent 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.
Texas has no personal tax and cheap electricity, so it’s no wonder it has the fourth-largest volume of bitcoin mining in the country. Its gross receipts tax could be economically damaging to companies, but because the state is eager to grow the crypto mining industry, it is offering a 10-year tax abatement, sales tax exemptions, and workforce training for major mining operations that set up shop in the Lone Star State.
States without personal income tax
States without corporate income tax
How to establish residency for tax purposes
Be aware that for individuals, changing residency is not as simple as simply announcing you live in a new place. Each state’s criteria for establishing domicile are slightly different, but most will require you to spend a significant amount of time in the new state. When investigating domicile validity, state tax agencies will look for the following, among other criteria:
Change of mailing address
Home rental or ownership
Proof of time spent in the state
Change of driver’s license and vehicle registration
Closing bank accounts in old state and opening accounts in new state
Change of voter registration
Location of employment
California, New Jersey, New York, and Massachusetts have what is called the “183 day rule.” This means that if you spent 183 or more days in their state you are considered a dual resident and must pay personal income tax in their state, regardless of where the income was earned. This can result in dual taxation.
Is Puerto Rico a crypto tax haven?
Puerto Rico has become a popular destination for U.S. taxpayers seeking to lower their taxes. Because Puerto Rico is an unincorporated U.S. 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.
If someone becomes a bona fide Puerto Rico resident, they can receive considerable tax breaks: individuals pay no capital gains taxes and corporations receive just a 4% federal income tax (compared to 21% in the states), among other incentives.
As you may imagine, 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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