Two things are certain: death and taxes (unless you’re living in El Salvador’s Bitcoin City where bitcoin is considered legal tender and you’re purely using crypto for transacting-in that case, only death would be certain). Because of this, if you are exploring for states to reduce your tax bill or a crypto investor seeking the best crypto-friendly tax state, here is a quick overview of those states without income tax and a friendly approach to the market that might allow you to hold on to your digital assets.
Crypto Income and Taxes in the US
Every US taxpayer has to file a federal income tax return, in addition, depending on their state of residence, the taxpayer will have to file a state and sometimes even a local tax return. The way this works, you prepare your federal income tax return, and then the state (s) returns as most states start with your federal taxable income or adjusted gross income and may adjust to your state taxable income. Generally most income taxable by the IRS will also be taxable by the states like dividend income, and investment income; unless it is specifically excluded such as income from federal bonds. The state does not exclude crypto income; unless it has no state income tax, it will generally be taxable. In general for state taxes crypto is taxable, but some u.s. states offer a tax-friendly environment for their citizens.
By settling in a state without income tax you might be able to keep a little extra of your money – obviously by doing this, you will not be fully excused from paying other taxes. Still, you will get access to more benefits like retirement (skipping paying state taxes on retirement plans). The most critical number to crunch is the cost of living; which includes: housing, food, wages, cars, health care, and lifestyle. If a taxpayer moves states halfway through the tax year, you would have to:
- File two part-year tax returns with each state, apportioning or allocating income based on days spent in each.
- If you move to a state with no income tax, then any income earned in the state with an income tax would be taxable through the date of when the taxpayer establishes legal residence in the state with no income tax, any income earned after, would be earned in the state without an income tax and thus not be taxable for state tax purposes. The same applies to capital gains, generally, any capital gains realized before establishing legal residence in the new state would be taxable by your old state. For more information consult with your tax advisor.
As expressed above, a good tax strategy to save on taxes is to live in a state with no taxes (a Tax-free state) because this will help to lower your tax burden. In general, no income tax results in other taxes being higher such as sales tax, property tax, and many more. As of 2022, these states do not impose a state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. It is crucial to add that there is an extra state, New Hampshire, that imposes a 5% tax on dividends and interest without taxing earned income – with taxation on investment earnings, but not a tax on earned wages.
The remaining states charge an escalating income tax where higher earners pay a greater percentage of their income (so their taxes are accordingly to their income).
Advantages & Benefits of living in a state without an income tax
If you are retired and living on a fixed income, such as with social security benefits, pension, or real estate, and no longer need to reside in a particular state, living in a state with no state income tax can be advantageous. Furthermore, those that work self-employed or as Freelancers/remote workers who have the flexibility to relocate can take a big advantage of the tax laws for each of the states mentioned above.
The main benefit is that you don’t have to pay state income taxes on the money you earn; since those tax rates differ from the state, you might take advantage of it. Also, if you’re currently living in a state with high personal income tax rates you might take advantage by moving out and avoiding that state’s income tax liability. Take into consideration that the more you earn, the more you can potentially save by establishing an income-tax-free state.
Which state is the most crypto tax friendly?
States need to recollect money from other taxes imposed to fund schools, hospitals, roads, projects, and other programs. Therefore, it is crucial to consider state sales tax rates; these differ by state, and as of 2022 the five states with the highest average combined state and local sales tax rates are Louisiana (9.55%), Tennessee (9.54%), Arkansas (9.48%), Washington state (9.29%), and Alabama (9.22%).
Multiple conditions must be met to glean the benefits of living in an income-tax-free state. Such as setting up a domicile and considering that rules differ by state, but overall you must spend at least half the year qualifying as a permanent resident. Keep in mind that if you live in one location but spend a big part of the year in another state, you could be considered a permanent resident of one state and a “statutory resident” of the other for tax purposes -ending up paying earned income taxes on both states. Since states reside on tax revenue to finance their programs and costs; consider general sales taxes, excise taxes (on services like fuel, tobacco, and alcohol), property tax rates, and other taxes before deciding.
If you are a business owner, you must check out some tax guidelines before moving to another state. Generally, most states that impose an individual income tax apply to all income garnered in the state. It all depends on your needs, because if you value good healthcare then Alaska and the District of Columbia should be on your radar since they spent a considerable amount on healthcare last year.
Finally, it is crucial to add that this decision should be backed up by the benefits you seek; if you are looking for states that don’t tax retirement distributions, Illinois should work if you rely on 401 (k) plans and IRAs. Hawaii might be a good alternative for pension plans because they don’t tax pensions and you get to be at the beach resting at your retirement.
States without income tax
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Where is the best place to live if you’re a crypto enthusiast?
The United States has one of the biggest crypto adoptions per capita. States like California, Colorado, Florida, Puerto Rico, Texas, and Wyoming want to attract the crypto industry by following specific approaches such as crypto payments adoption, friendly regulations, and many more.
Even though California has the highest income tax rate in the country(around 13%), some of the biggest shares of blockchain technology hires this year happened in this state (especially in Los Angeles and San Francisco), also some of the biggest digital currencies exchange and crypto companies are located in the area (like Coinbase, Kraken, and FTX.US). Its population is highly interested in crypto. Besides that, the Office of Financial Technology and Innovation recently created a cryptocurrency department to expand the encouragement of adoption and crack down on bad crypto practices.
Colorado is a leading state in the crypto revolution, it has high crypto usage and crypto-friendly laws.
Florida is home to many entrepreneurs, crypto enthusiasts, and NFT bros; crypto adoption has been inevitable in the last year, enabling buying real estate with BTC, and ethereum. It has also hosted one of the biggest crypto conferences (Bitcoin Conference in Miami). Currently, there is a proposal in discussion, hoping the state accepts crypto payments toward certain state taxes.
It has some of the most crypto-friendly regulations in the United States and has approved over 20 laws to make it easier for crypto businesses to operate. Wyoming is the first state to recognize a DAO as a legal entity – providing credibility to the space and paving the way for crypto adoption in the long run. Also, the state doesn’t collect any corporate or personal income tax attracting many crypto enthusiasts.
With the approval of the Puerto Rico Incentives code, the island gathered a unique tax status because it is a US territory viewed as a foreign country for US federal income tax purposes. Therefore, there are tax incentives plus an individual tax for its residents to promote economic growth; so if you become a resident on the island and relocate your business there – all your future capital gains on stocks, bonds, and crypto earnings can become tax-free if applicable according to the Act 60-2019 – some benefits include 100% tax exemption from Puerto Rico income taxes on all capital gains accrued, after establishing residency at the island.
When you become a “bona fide” Puerto Rico resident, you can access multiple tax breaks: individuals pay no capital gains taxes, a corporate tax of 4%, and many more. To qualify for this, you need to be present in Puerto Rico for a significant amount of time – It has to become your “tax home.” Also, you must have “closer connections” to Puerto Rico (like mailing address, bank account location, driver’s license, investment location, and many more). It is crucial to add that Puerto Rico also requires those taking advantage of these tax breaks to donate 10,000 u.s. dollars to charity per year to continue being eligible for these benefits.
Having no personal income tax and some pro-crypto laws plus low energy costs is particularly appealing to the bitcoin mining industry – giving incentives and tax credits to miners. Recently the legal status of cryptocurrencies was recognized, paving the way for financial institutions to provide custody services for crypto assets.
Establishing residence for tax purposes
Each state’s criteria for setting up a domicile differ, but most of them agreed that you have to spend at least half of the year living there to become a valid resident; there are also extra criteria that need to be met like: location of employment, change of mailing address, home rental or ownership, proof of time spent in the state and many more.
At the moment, New York probably has the strictest crypto rules in the US (mostly due to a recent increase in scam projects in the crypto market). An example of these strict rules is that trading USDT is not allowed in the city (due to the risks involved with the currency). Some enthusiasts in New York expect the state will become the biggest crypto hub in America in the upcoming years, Hence, they have addressed the income tax treatment for virtual currencies as well as New Jersey, and Wisconsin. Due to the market’s high volatility, cryptocurrency taxes are a complex topic, and only a few states have labeled cryptocurrency in tax laws making filing your taxes for your crypto investments even more difficult.
If you have been terrified by all the hype regarding the IRS crackdown on cryptocurrency exchanges and you are worried about the IRS coming after your earnings, the best thing to do is use crypto tax software to generate a tax report for your crypto transactions and take advantage of their tax loss harvesting tool to reduce your tax payment. Accointing.com is a tax software capable of recognizing multiple wallets simultaneously and categorizing them according to the IRS crypto regulations – helping you track and file your taxes, from Bitcoin to Defi to NFTs, and everything in between. The best part is that the tax filing can be automatically done and you can share your results with your CPA of trust.
Disclaimer: This is not tax advice. Please consult your tax adviser for further information before engaging in any decision. This material is intended for educational and entertainment purpose.