Crypto Taxes for US Expats: A Comprehensive Guide
Posted On July 31, 2023
Crypto taxes for US expats is pretty simple when you remove all the nuances: You may not always be liable to capital gains taxes on your crypto gains or income taxes on your crypto income, but regardless of your tax liability, you must always report all your gains, income, and gifts to the IRS.
Whether you’re considering a move abroad or already living outside the United States, as a crypto investor or trader, you must understand the tax implications and challenges of being a US expat. From simplifying the legal jargon of becoming a US expat to reporting obligations and tax-saving strategies, this guide will address all your questions and concerns.
Becoming a US Expat
An expat or an expatriate is someone who resides outside their home country, usually for work or personal reasons. When US citizens move abroad, they become US expats and may be subject to different tax obligations than those residing within the United States.
But not everyone traveling overseas immediately becomes an expat. This is where your tax residency comes in. Your tax residency will determine your tax obligations in a specific country and is based on multiple factors, such as length of stay, ties to the country and your tax domicile – your permanent legal residence.
However, in the United States, citizens are generally subject to taxation on their worldwide income, regardless of where they reside. So, as a US expat, you may become a tax resident of your new country while still retaining certain tax obligations to the United States.
This poses a common challenge in crypto taxes for US expats – dual taxation. Dual taxation occurs when a taxpayer is subject to tax obligations in both the United States and their new country of residence.
But many countries, including the United States, have entered into several tax treaties to solve this issue. These tax treaties aim to avoid double taxation and allocate taxing rights between countries. More on that later.
Understanding US Crypto Tax Obligations
The IRS considers cryptocurrencies as property, leading to two key tax categories: capital gains taxes and income taxes.
Capital Gains Taxes:
When you sell, spend, swap, or dispose of your crypto and realize a capital gain, you become liable for capital gains taxes.
Short-term gains (crypto assets held for less than a year) are taxed at rates ranging from 10% to 37%, while long-term gains (crypto assets held for over a year) are taxed from 0% to 20%.
Not to mention, You can utilize your losses to offset gains or reduce taxable income by up to $3,000 (if you have no gains to offset).
If you earn crypto as income or salary, it’s subject to income tax rates. Selling products, providing services, or completing tasks for crypto income triggers income taxes.
Examples of such activities would be mining and staking crypto, rewards from play-to-earn games, airdrops and hard forks. Income tax rates range from 10% to 37% based on your income brackets.
While we are at it, We should also talk about the importance of accurate record-keeping for reporting your crypto taxes in the US.
Detailed records help calculate capital gains/losses, determine cost basis and report income accurately. Furthermore, they are essential for distinguishing short-term and long-term gains, offsetting losses and providing evidence during audits. However, it can get tricky to do all that manually by yourself. Instead, consider using a crypto tax tool, like Bitcoin.Tax.
Crypto Taxes for US Expats Moving Abroad
Now that we have a basic understanding of the tax framework for US expats and residents, let’s get more specific and delve into the complexities of crypto taxes for US expats.
Capital Gains Taxes for US Expats
When you sell, send, swap or dispose of your crypto and realize a gain, you’re subject to capital gains taxes. However, if you’ve already paid taxes on your crypto gains in your current country of residence, you can claim the tax amount you paid (in dollars) to offset your crypto taxes in the US.
You can do this by claiming a foreign tax credit on Form 1116. However, this may or may not be the best tax-saving strategy based on your situation. So, you may need to consult a professional.
Regardless of claiming the foreign tax credit, you must report all disposals (gains and losses) on Schedule D (Form 1040) and Form 8949.
Income Taxes for US Expats
You pay income taxes when you receive crypto as a salary or compensation for selling your products or services. Similar to the foreign tax credit, taxpayers can claim a foreign earned income exclusion that allows them to exclude up to $112,000 of foreign-earned income in 2022.
However, as mentioned, you must still report all your income on Schedule 1 (Form 1040) or Schedule C (Form 1040).
Crypto Gift Taxes for US Expats
While gifting crypto is generally tax-free, you must report it on Form 709 if the value of the gift exceeds $16,000 (in 2022). On the other hand, if you receive a crypto gift, it’s tax-free, but calculating the cost basis of the gift can get super complicated. Check out this article, where we simplify calculating the cost basis on crypto gifts you receive.
Additionally, if you receive a foreign gift of $100,000 or more ($155,000 or more if received from a foreign spouse), you must declare it on Form 3520. For example, if you’re a US expat living in Germany and receive a crypto gift from a German resident, you must declare that gift on Form 3520.
Can you Avoid Paying Crypto Taxes as a US Expat?
Moving abroad doesn’t make you immune to the methods and strategies employed by the IRS and other tax authorities to track individuals evading taxes.
The United States has a global tax system, which means US citizens are generally subject to taxation on their worldwide income, regardless of where they reside. So even as a US expat, you remain responsible for reporting and paying taxes on your crypto gains and income.
It’s also a common misconception that crypto is untraceable, leading some individuals to believe they can avoid taxes altogether. But that is far from the truth. While crypto may offer some level of anonymity, all transactions on blockchain leave a digital trail, which anyone can access and see.
The IRS and other tax authorities have become increasingly adept at tracking crypto transactions, utilizing blockchain analysis and cooperation with crypto exchanges to identify individuals who may be evading taxes. Tax evasion is a criminal offense that can lead to hefty fines, penalties and even imprisonment.
While you can’t entirely avoid paying crypto taxes as a US expat, there are legal ways to reduce your tax liabilities. For instance, you can employ the tax-loss harvesting strategy, donate crypto to charity or invest in tax shelters. Check out our complete guide on avoiding crypto taxes in the US for more.
So, there you have it. This guide has laid down the essential framework for understanding tax obligations for US expats, especially when it comes to crypto taxes.
Now you’re equipped with a solid foundation to navigate the complexities of crypto taxation when moving abroad. However, when dealing with intricate and nuanced challenges unique to your situation, it’s always a good idea to reach out to a tax professional for expert advice.
By leveraging this guide and seeking professional guidance when needed, you can confidently navigate the world of crypto taxes as a US expat.