A quick point not yet covered: After some personal experimentation, I've discovered quite a few hindrances to establishing and tracking all "best practices" for SEO via WordPress.com. The lack of plugins prevents all manner of SEO extensions… WordPress.com does not make use of certain ranking factors, like the page Meta Description, for example.
Thus, I'll say this: it's possible to transfer the SEO benefits of a wp.com site that uses a custom domain to a self-hosted WP install, or other WP hosting provider – in fact, wordpress.com offers a specific premium option ($120) to assist with such a migration. What is not possible, is achieving optimally SEO'd pages using wordpress.com to begin with.
deano.com 