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Cryptocurrency & International Tax Reporting Requirements for American Expats
Posted on August 9, 2021
Donald Powell is a Kentucky asset protection and estate planning attorney who works with wealthy clients, often in the international context. We recently collaborated, and we invited him to write a brief blog post about taxation, cryptocurrency, and reporting requirements for U.S. expats.
The United States imposes an income tax and various reporting requirements on the worldwide earned income of a U.S. citizen expat.
(Note that the transfer taxes, such as the federal estate tax, may also apply, though applicability is determined under a different standard.)
Further, the U.S. citizen living abroad is subject to various reporting requirements.
Both not paying taxes owed and not meeting reporting requirements can lead to civil and criminal penalties.
In this article, I will briefly discuss a mostly unfounded concern about double taxation, tax reporting requirements for U.S. citizens, and then touch on some unique issues surrounding cryptocurrencies.
I. Avoiding Double Taxation
A common concern for U.S. citizens living abroad is double taxation. Luckily, this concern is often unfounded due to the foreign earned income exclusion (FEIE), the foreign tax credit (FTC), and income tax treaties.
The FEIE enables a U.S. citizen who lives abroad to exclude some foreign income and the cost of some housing from U.S. taxation. To qualify, the U.S. citizen must either be a bona fide resident of a foreign country for a tax year or be physically present for at least 330 days within a consecutive 12-month period. The FEIE aims to prevent double taxation.
Second, the FTC is a non-refundable credit for foreign taxes paid. The policy behind the FTC is a recognition that the value of cross-border economic activity is diminished when such activity may be double taxed.
Note that the FTC is a credit that is applied to the tax owed after deductions. As a simplified example, if an individual earns $100,000 of taxable income and pays a 20% tax in a foreign country, a $20,000 credit will offset the individual’s U.S. income tax bill.
Finally, bilateral income tax treaties between the U.S. and foreign countries address various situations to ensure that only one country claims the right to tax certain income.
II. General Reporting Requirements
Different minimum income requirements for required filing vary depending on age and filing status. Filing status is either single or married (filing jointly or separately).
For a single person under the age of sixty-five, the threshold is $12,400. For those married and filing jointly, this amount of income is doubled.
Note also, the self-employment tax is a separate tax, and the reporting threshold is $400.
III. The Cryptocurrency Landscape
Cryptocurrency is a modern phenomenon. In short, it is a digital asset that is made possible through clever mathematics.
A. Background & History
Suppose you have a file on your computer. If you send it to someone, there is no guarantee that you did not retain a copy. Basically, the math used assures that someone receiving cryptocurrency (or a file, to continue the example) that the payor is the rightful owner. And, after that that the network will recognize their exclusive right to spend it as they like.
That’s it. Sounds simple enough, but it wasn’t until 2008 when Satoshi (whose identity is still unknown) described the original bitcoin protocol that virtual currencies were possible.
Since Bitcoin, there have been tens of thousands of cryptocurrencies.
B. Taxation of Cryptocurrency
Now, according to the U.S. government, cryptocurrency should be taxed as property and not as currency.
This means that you have a tax basis in a unit of cryptocurrency, and you owe tax on the difference between what you sell it for (or the value of what you purchase with it) and that tax basis.
If you file a U.S. tax return (Form 1040) then you will be asked whether you “sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency.” If you answer this question falsely, then you may be subject to both civil and criminal penalties.
Planning for the U.S. income tax is important, not only as part of an integrated approach (along with estate planning) to preserving and building family wealth, but to avoid the possible imposition of criminal penalties.
If you are a U.S. citizen who lives abroad and have need for estate planning, asset protection, or income or transfer tax planning, please contact me today.