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As an expat engaging in the purchase, investment, and trading of cryptocurrencies, you might be questioning the tax implications. The IRS has intensified its scrutiny of expats utilizing cryptocurrencies such as Bitcoin, emphasizing the need to report and pay taxes on these earnings in tax returns. It is crucial to declare crypto-sourced income and assets to the IRS, as failure to do so can result in substantial fines and potential passport revocation. This post aims to provide an understanding of what cryptocurrencies are and why they are significant in the context of US expat taxes.
Cryptocurrency 101
To start, cryptocurrency is a type of digital currency and is typically not issued by a central government or bank. The first and most well-known cryptocurrency was Bitcoin, released in 2009.
Transactions from cryptocurrency are similar to money transfers or credit card payments. However, the funds do not move through a banking system. Instead, money moves through a specific cryptocurrency network, thus removing banks as the middleman.
When it comes to the type of currency – they come as virtual currencies like Bitcoin and Ethereum.
However, in the eyes of the IRS, cryptocurrencies are not recognized as currencies but as property.
Additionally, Cryptocurrency is something of value that can be exchanged and traded similar to stocks. Therefore, just like reporting income on a tax return when you sell stocks, you as an expat will need to report your cryptocurrency assets on a tax return, too.
The current tax returns were adjusted to include the question: “At any time in 2023, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. You can find this question in our intuitive software, which helps expats file their US taxes in a smooth, straightforward manner.
Cryptocurrency Income with Expat Taxes
Typically, Americans abroad use cryptocurrency in the following three ways:
- To receive money
- To send or transfer money
- To use as an investment
Cryptocurrency can generate income because the value fluctuates from time to time – during the time you buy crypto until you sell or trade it.
When the value of your crypto changes, it becomes a capital gain or loss within the US tax system. Therefore, you must report it on your tax return.
For you, as an expat, to properly report your crypto transactions on a tax return, you need to review every transaction you had throughout the year. Some questions you can ask yourself are:
- Did the crypto assets (tokens or coins) appreciate or depreciate in value? In other words, are they now worth more or less than when I received them?
- How many times in the year did I trade cryptocurrency with people?
- Where did I invest my crypto?
When you sell crypto after holding it for over a year, you’ll incur a capital gain, subject to taxation at a reduced rate. However, if the holding period is one year or less, the capital gain is categorized as short-term, and you’ll be required to apply the federal US tax rate corresponding to your income bracket.
If you’ve suffered capital losses on your cryptocurrency, you can offset it as taxable capital gains on other investments. This includes up to $3,000 of ordinary income. If you have unused capital losses, they will be carried forward to future tax filings.
Trading and Converting Cryptocurrencies
Additionally, here are two more points to consider with reporting cryptocurrency:
- You need to report the capital gain you got from crypto if you traded your crypto for another type (like trading Ethereum for Bitcoin).
- If you ever convert your cryptocurrency into non-cryptocurrency (like into USD or Euros), you also need to report the capital gain or loss on the day of conversion too.
Sending Crypto as a Gift
One of the first questions you can ask yourself is whether you sent crypto as a gift. If you have sent cryptocurrency as a gift, one time or spread throughout the year, totaling at least $17,000, you’ll need to report the transactions on Form 709. This is the gift tax return which you can find in our software.
Plus, you’ll also need to inform the person you gave the gift to about the cost basis of your crypto. Meaning how much you paid in US dollars to purchase the quantity of crypto you sent as a gift.
Keep in mind, you only need to file Form 709 if you sent at least $17,000 worth of cryptocurrency to someone, either once or over multiple transactions throughout the year.
Using Crypto to Buy Something
If you used crypto to buy something, you must report your transactions on Form 8949 (Sales and Other Dispositions of Capital Assets), and Schedule D as a capital gain.
Additionally, you’ll need to report the change of the cryptocurrency value from the first day you bought it until the day you disposed of it.
If your crypto value increased over time, you have a capital gain and need to report it as such. If the opposite happened – your crypto lost value, and you have a capital loss transaction to report.
Every time you have a loss or capital gain when you buy something with crypto, you will need to report it on your tax return. It is important to use a trading platform that provides you with US-friendly tax reports. This includes filling-out Form 8949 or Schedule D so, MyExpatTaxes can integrate into your annual US expat tax return.
Our software helps expats with cryptocurrency all the time, and it’s much easier to do it through our software than through manual paperwork!
Using Cryptocurrency to Receive Money
Have you received cryptocurrency as a gift?
If it was as a gift, then you have two reporting duties:
- Reporting the capital gain when you spent the crypto gift on something
- Possibly reporting it as a foreign gift (see below)
If the crypto gift came from a citizen of a foreign country, then you need to report it as a foreign gift on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or through our software.
The general rules for reporting gifts on a tax return from foreign citizens is the following:
- $100,000 or more in gifts from foreign citizens needs to be declared on a return
- Or $155,000 or more in gifts from a foreign spouse must be declared on a return
This is the same for cryptocurrency. If Alex transferred 6 Bitcoin to Mara, which is worth a combined $138,000 US dollars, then Mara will need to report it on her tax return. Even if the gift itself is not taxed. Furthermore, Mara does not have to pay taxes on cryptocurrencies as an expat – only report it.
Next, if you used cryptocurrency as payment from something you sold, this counts as business income. You can report this income on Schedule C on Form 1040, Profit or Loss from Business.
Exchanging Cryptocurrency For Another
If you use one type of cryptocurrency to purchase another one (e.g.: Ethereum to Bitcoin) there is no reporting requirement. It is only until you either gift them, convert them to fiat currency, or buy something else, then you need to report it.
Reporting cryptocurrencies can seem complicated, which is why our intuitive software will assist you in doing it correctly. Plus, you can always seek advice from one of our tax professionals who is available on live chat within the app.
Do You Have to Report Cryptocurrencies on FBARs?
An FBAR is the Foreign Bank Account Report – a filing requirement for Americans who have a total of over $10,000 in foreign bank and investment accounts at any time during a year.
An article by The National Law Review states there are talks that FinCEN is seeking to establish an FBAR requirement for cryptocurrency accounts in 2024. Furthermore, if such a law is established, crypto accounts will need to be reported under the FATCA law.
Excluding Cryptocurrency on a US Tax Return
Some Americans abroad want to save their cryptocurrency transactions from US taxation using exclusions like the FEIE (Foreign Earned Income Exclusion).
However, you can only do this if the cryptocurrency comes from:
- a trade or business income, or
- wages paid by an employer
However, only after receiving crypto does any increase or decrease in value mean a capital gain or loss. And as we’ve explained above, capital gain income cannot be excluded from US taxation.
Expat Taxes and Cryptocurrency
As you can see, the IRS is keeping a close eye on expats who have crypto investments. Therefore, it’s important you comply with IRS law and report your assets every year on a federal tax return.
Most likely, you don’t ever have to pay taxes on cryptocurrencies as an American expat. However, if you ever need help on your expat taxes with cryptocurrency, our tax team is standing by. Start today with MyExpatTaxes!
