The Italian government approved a 26% capital gains tax on cryptocurrency in 2023 and recently proposed to further raise it to 42%. These taxes align the treatment of cryptocurrencies with that of traditional investments like stocks, positioning crypto within the same regulatory and tax framework as other financial instruments.
On November 16, the French Senate presented a proposed amendment as part of Budget 2025 to tax "unproductive capital gains." The proposal extends the above logic, treating crypto holdings akin to other forms of wealth or equity. US legislators have also enacted tax reporting provisions for digital assets.
Unrealized gain taxation often applies to high-net-worth individuals or businesses. Martin Manolov, Finance Director at Nexo, provides the following insight into the legislative developments:
"Europe's evolving tax policies reflect the growing importance of cryptocurrency within the financial ecosystem. Measures like Italy's 26% capital gains tax on transactions over €2,000 and France's proposal to tax unrealized gains showcase efforts to integrate crypto into traditional regulatory frameworks. For investors, this marks a turning point, underscoring the need for adaptable wealth management strategies."
These countries' measures aim to capture revenue from the growing wealth the crypto market generates. The IMF writes that crypto ownership is highly concentrated at the top, and the capital gains tax revenue that's at stake globally may amount to tens of billions. VAT and sales taxes face an even more profound risk.
Investors are exploring more favorable regimes
Martin Manolov encapsulates the inevitable reaction: "Wealthy individuals, in particular, are exploring favorable tax regimes in countries like Luxembourg, Switzerland, and Portugal. Financial advisors report a noticeable increase in inquiries about asset relocation, driven by a desire to safeguard wealth amidst fiscal changes."
Portugal's crypto-friendly economy offers significant tax advantages. There is no wealth tax on digital assets, and capital gains from crypto held for over 365 days remain tax-free. In Switzerland, the sale of cryptocurrencies is tax-free as long as the entity is a private investor, according to the Federal Tax Administration's criteria.
Gains from cryptocurrency held for more than six months are generally tax-exempt in Luxembourg, resulting in a zero rate for such long-term holdings. The Grand Duchy's annual Net Wealth Tax (NWT) applies to corporate investors, including holders of crypto assets. However, this rate is only 0.5% and is due on a taxable base of up to EUR 500 million ($525 million).
Embracing alternative approaches to wealth management
The stark differences in tax rules from one country to another have prompted a considerable rise in inquiries into alternative wealth management approaches. Martin Manolov elaborates:
"Navigating Europe's evolving tax landscape requires investors to adopt smarter, more efficient approaches to wealth. Rather than simply relocating, many investors are adopting a strategy long used by billionaires: leveraging assets instead of selling them to avoid taxable events and reinvesting the borrowed capital to grow wealth further. This lending and borrowing model is one of the oldest and most effective tools for preserving and building wealth."
Using cryptocurrency as loan collateral
These approaches are not without risks, which their increasing viability may outweigh. One of the most common methods is using cryptocurrency as loan collateral rather than selling it. This avoids capital gains tax since borrowing is not considered a taxable event. An investor would deposit crypto into a digital asset bank or lending platform, take out a loan in stablecoins or fiat currency, and invest the loan while retaining crypto ownership. No capital gains tax is owed because the investor hasn't sold the crypto. He continues holding it, benefits from any price increase, and repays the loan at his convenience.
Diversifying investments: Yield farming, stablecoins, and crypto trusts
Martin Manolov introduces the concept of innovative diversification: "Beyond asset-backed borrowing, at Nexo, we've observed a growing trend among investors seeking income-generating solutions and efficient diversification tools. These tools allow them to grow wealth passively and reduce exposure to market volatility. These strategies help align portfolios with modern tax realities, offering a practical way to adapt to evolving regulations without compromising growth potential. This shift highlights a broader practice in financial management: a movement toward innovative, compliant solutions that empower investors to stay ahead while focusing on sustainable wealth-building. As tax frameworks evolve, these strategies are becoming essential for anyone seeking to navigate the complexities of today's financial environment effectively."
Relevant approaches include yield farming and staking, using stablecoins, and establishing crypto trusts. While staking rewards are taxable as income, the principal amount staked remains untouched, and capital gains tax is avoided.
Investors can use stablecoins pegged to fiat currencies for liquidity without realizing gains. They would exchange crypto assets for stablecoins on a DEX and then invest or lend the stablecoins. However, this approach wouldn't work in jurisdictions that tax the conversion of cryptocurrencies to stablecoins.
One can establish a crypto trust to reduce or defer taxes. They would transfer crypto into the trust, which can manage or sell it without triggering immediate capital gains taxes. Beneficiaries may receive distributions under favorable tax conditions.
The implications of non-compliance
Failure to comply with increasingly complex European regulations can result in fines, audits, and, in the worst case, asset seizures. Governments may impose higher taxes on gains and wealth transfers, but strategies for wealth preservation allow holders to reduce or avoid these taxes legally. Non-compliance can significantly erode wealth and reputation. Investors are encouraged to consult financial advisors and explore innovative tools and strategies for adapting to evolving tax frameworks.
A trustworthy advisor should have verifiable expertise and comply with recognized professional standards. Any tools an investor chooses to explore must adhere to relevant laws and AML/KYC regulations and must have undergone reputable third-party audits. Additionally, it's reasonable to ask for references from existing clients with similar financial goals or profiles.
