Portugal is a standout in the EU for its less conventional, more progressive approaches to certain areas of public policy. It was the first (and still the only) country in the EU to decriminalize all drugs — a radical solution that has had the salutary effect of combating addiction and drug overdoses. The Iberian country also employs perhaps the most lax bitcoin tax policy of any country in Europe. Portugal’s tax authority recently clarified that bitcoin payments and realized gains are exempt from capital gains tax. Yes, that means, no matter how long you hodl or how much “number go up” (as the meme goes), your bitcoin gains are tax free in the country.Despite the recent clarification, the policy is actually nothing new. Kevin Loaec, a Portuguese resident, told me that he moved to Portugal two and a half years ago to capitalize on the zero-taxation opportunity and found his Bitcoin consulting agency, Chainsmiths. The policy has created a tax haven for investors and crypto companies alike, he told me, and is the reason why coworking space The Block Cafe houses a thriving Bitcoin startup community.Portugal’s policy, more than just a bitcoiner’s dream, provides a good blueprint for how governments should treat bitcoin services and transactions writ large.A Paragon of Bitcoin Friendly Tax PolicyThe clarification is the result of an unnamed Portuguese mining company’s formal “request for binding information” on the status of bitcoin services in relation to the country’s value added tax (VAT).In the EU, a VAT is a tax tacked on to certain goods and services at every step of their production, from manufacturing to sale. Let’s say a country has a 10 percent VAT on clothes. SuperDope Inc. can produce hoodies for $10 each and sell them for $20 to retailers. With a VAT of 10 percent, SuperDope’s $10 in revenue would earn the government $1 for each hoodie sale. When the retailer then sells this to a customer for say, $40, they would then pay a VAT of $2. You might see how this taxation scheme can create a sticky levy for Bitcoin companies and users. If the Portuguese mining company, for instance, had to pay a VAT to mint new bitcoin, and then would have to pay another VAT when selling to exchanges, this would seriously threaten its ability to remain solvent. Same with exchanges; imagine if an exchange had to give the government a slice of each trade.Luckily, considering that the average VAT in Europe is 21.3 percent, cryptocurrency companies aren’t required to pay a VAT on these services — at least, that’s the case in most EU countries. In the document clarifying its bitcoin tax policy, the Portugal Tax Authority uses a precedent from a 2006 EU Council Directive. Since, under this directive, “transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest” are “exempt from VAT,” so too is bitcoin. In effect, this means payment in cryptocurrencies, as well as trading them in for fiat, carries zero tax implications.To inform its decision further, the Portugal Tax Authority draws on another precedent set by the Court of Justice of the European Union (CJEU). David Hedqvist, operator of Swedish bitcoin exchange bitcoin.se, petitioned the court to clarify whether his exchange would be subject to the EU’s VAT for “supply of services.” The court found that, while the exchange of bitcoin for fiat or vice versa is a supply of service, it is subject to an exemption under Article 135(1)(e) of the EU’s VAT Directive. Portugal’s law is in accordance with this decision.“Having regard to the decision of the CJEU … the exchange of cryptocurrency for ‘real’ currency constitutes a provision for consideration, exempt from VAT,” the Portugal Tax Authority wrote in its clarifying document.Follow the Leader?Even though the CJEU’s decision on Hedqvist’s case set this precedent (and encouraged countries like Norway to recant the VAT it imposed on bitcoin services), EU member states answer the question of VAT taxation differently. The act of simply exchanging bitcoin for fiat in France may not be subject to a VAT, for instance, but things like mining revenue, processors (like BitPay) charging fees for managing payments, and exchanging bitcoin for goods and services are all subject to VAT.Other countries take different approaches. Germany, perhaps the EU country with the second most deferential tax policy toward bitcoin, mandates a 25 percent capital gains tax on bitcoin — but only if the citizen cashes it out within a year of purchasing; if they wait longer, the tax becomes inert. Malta’s code follows a similar logic.Certain EU members, like Belgium, Spain, the Netherlands and Finland, exempted bitcoin services from VATs before the CJEU’s 2015 decision Switzerland did too, though it’s not a member of the EU. Denmark, on the other hand, imposes a 25 percent VAT on mining, mimicking France’s approach to taxing bitcoin services.Portugal’s bitcoin taxation policy, by and large, is one of the most hands-off in the world and one other countries should take note of. Of course, any bitcoin holder would revel at the prospect of a bitcoin free from the fetters of national taxes (especially considering those libertarians among us whose favorite mantra is “taxation is theft”), but it’s unlikely that governments will exempt bitcoin from capital gains or income taxes. Even Loaec told me that there’s “[n]o guarantee [Portugal] won’t change in the future,” adding that traders aren’t exempt from taxation if their income stream comes from trading (businesses who produce income for holding bitcoin aren’t exempt either).As much as tax free bitcoin gains would be appreciated, this is not the important takeaway from Portugal’s policy. The important takeaway — and the clarification that the recent tax authority document provides — is that bitcoin services (like exchanging) and remuneration/payment in bitcoin are not subject to taxes. The inverse of this lax policy is France’s own, which could mire bitcoin businesses in hefty levies that could spoil profitability. For the United States and other countries like Israel, Portugal’s practical treatment of bitcoin payments presents a more rational taxation plan. In the U.S., as in Israel, each transaction is treated like a taxable event. This means that if you trade bitcoin for ether, any gains you may have realized from when you bought bitcoin a) must be reported and b) are taxable income under capital gains laws; this also means that, if you bought bitcoin at $100 and then use it to buy, say, a laptop when it was $1,000, in the eyes of the IRS, you just realized a $900 gain.This system, criticized as ludicrous by some in the community, is under review by the IRS. It’d be dandy if the agency decided to exempt bitcoin investment gains entirely from taxes, but this is about as likely as President Trump signing an executive order to make bitcoin legal tender under U.S. law. At the very least, the IRS should heed Portugal’s prudent policy and treat cryptocurrency transactions like typical currency transfers. Same goes for places like France that would tax bitcoin’s circulation every step of the way. Otherwise, bitcoin businesses and investors might find these country’s tax codes untenable. And if they have the option, they might try to park their wealth in a country that doesn’t make you pay every time you pass go.