In 2023, the Italian government imposed a 26% capital gains tax on crypto, aligning digital assets with traditional investments such as stocks. Recently, it suggested raising this rate to 42%, further solidifying cryptocurrencies within established financial regulations. Similarly, France introduced a proposed amendment in November to tax unrealized capital gains, further categorizing crypto as wealth on par with equity or other financial holdings.
The concept of taxing unrealized gains, which primarily targets high-net-worth businesses and individuals, has gained momentum in Europe. According to Nexo’s finance director Martin Manolov, such measures signal the growing recognition of cryptocurrencies’ role in today’s financial landscape.
Governments are seeking to capture revenue generated by the significant wealth created through the crypto market. According to the IMF, crypto ownership is heavily concentrated among the wealthiest individuals, and taxing capital gains globally could generate billions in revenue. Further taxation, such as sales taxes and VAT, could present additional challenges, particularly as crypto continues to grow in influence.
Faced with these developments, many wealthy individuals are exploring alternative tax-friendly jurisdictions such as Portugal, Luxembourg, and Switzerland. These countries offer various advantages for crypto investors. In Portugal, there is no wealth tax on digital assets, and profits from cryptocurrency held for more than 365 days are tax-free.
Switzerland also provides significant benefits; crypto sales are tax-exempt as long as the investor qualifies as a private individual or entity. Similarly, Luxembourg does not impose taxes on crypto gains if the assets are held for over six months. For corporate investors, Luxembourg’s Net Wealth Tax (NWT) applies but remains relatively low at 0.5% for taxable bases up to $525 million.
These differences in taxation across Europe have prompted investors to seek smarter ways to manage their wealth. As Manolov explains, investors are increasingly turning to strategies used by billionaires for decades, such as leveraging their assets rather than selling to avoid taxes and using borrowed funds to further grow their wealth.
For example, crypto can serve as collateral for loans. In this case, an investor deposits their crypto with a lending platform, borrows funds in fiat currency or stablecoins, and reinvests the loan elsewhere while retaining ownership of the crypto. Because the assets are not sold, no capital gains tax is incurred. The investor can also benefit from future price appreciation while repaying the loan on their terms.
Manolov also highlights a broader shift toward innovative financial solutions, such as diversification and passive income generation, as tools for managing wealth amid evolving regulations. These include staking, yield farming, and crypto trusts.
Staking allows investors to earn income on their holdings without selling the principal assets, avoiding capital gains tax on the amount staked. Stablecoins, pegged to fiat currencies, provide liquidity without the need to sell crypto assets. Investors can exchange their digital holdings for stablecoins and either lend or invest them. However, this approach depends on local laws, as some jurisdictions tax the conversion.
Establishing a crypto trust offers another option for tax optimization. By transferring digital assets into the trust, investors can sell or manage their crypto holdings without immediately triggering capital gains tax. Distributions from the trust can then be made to beneficiaries under more advantageous tax circumstances.
There may be serious repercussions for noncompliance with the tax laws, including audits, penalties, and even asset seizures. For this reason, investors can adopt legal wealth preservation strategies and consult with knowledgeable financial advisors who act under applicable laws, such as KYC requirements. Additional reassurance can be obtained from recommendations from comparable clients and credible third-party audits.
Offshore investors with holdings in firms like Marathon Digital Holdings Inc. (NASDAQ: MARA) can talk to their financial advisors about how best to maximize their returns on their crypto investments as the tax rules keep evolving.
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