Cryptocurrency Tax Reporting Requirements for Expats
For those of you who have invested in cryptocurrencies over the years, the enterprise can be a lucrative one. And therefore keeps bringing investors – some of whom are U.S. expats – back for more. However, as with any form of currency, the Internal Revenue Service has a keen interest in digital money, so whether you find yourself in possession of Bitcoins, Ethereum, or any other kind of cryptocurrency while living abroad, you’ll likely have to file one or more reports as part of preparing a U.S. expat tax return.
Ultimately, what cryptocurrency tax requirements apply to you will depend on the nature of your holdings and transactions. From the perspective of the IRS, digital currency is a type of property, rather than regular income earned in the form of dollars or euros, so the taxation of cryptocurrency looks a lot like the taxation on, say, the sale or purchase of a house. For expats with Bitcoin or similar currency, this means that the IRS will not tax you on cryptocurrency that’s in your possession – only on what is sold or received. That said, even if you don’t buy or sell any cryptocurrency in a given tax year, you’ll likely have to report what you have to the IRS under FBAR or FATCA reporting requirements.
The first of the tax reporting requirements you should know about if you own digital currency and live overseas is related to the Foreign Account Tax Compliance Act – FATCA for short. Although the IRS doesn’t treat things like Bitcoin the same way they do cash, the government does still recognize cryptocurrency as a form of financial asset; as such, U.S. expats must file IRS Form 8938, Statement of Specified Foreign Financial Assets, if their overall financial holdings – including cryptocurrency – pass the relevant threshold established under FATCA. These tax reporting thresholds vary depending on two factors: marital status and country of residence. Expats looking to take care of their foreign financial account reporting as an unmarried taxpayer must file Form 8938 if they have more than $200,000 in assets at the end of the tax year or more than $300,000 in assets at any point during the year; for married expats filing a joint return, these reporting thresholds are doubled. Keep in mind that the assets in question can include a number of different accounts and investments, including cryptocurrency, foreign stocks, and contracts with foreign citizens.
The second of the two main tax reporting requirements that may apply to expats in possession of cryptocurrency has to do with the Report of Foreign Bank and Financial Accounts, more commonly known as the FBAR. Under these requirements, any U.S. citizen living abroad must file a report with the Financial Crimes Enforcement Network (FinCEN) if they have one or more accounts totaling $10,000 or more at any point during the year. Because the IRS currently considers cryptocurrency to be property, rather than cash, expats with accounts holding digital currency don’t technically have to file a report under FBAR requirements, but as Congress works to update U.S. tax laws as they relate to cryptocurrency, the situation could quickly change, especially under a President Biden and a Democratic administration. To be on the safe side, talk with an international tax specialist about submitting FinCEN Form 114 anyway to ensure full compliance with the law and avoid potentially expensive penalties.
If you were unaware of your cryptocurrency reporting requirements or simply didn’t know that expats still had to file U.S. taxes, know that there is a way you can come into compliance without having to worry about late fees or other penalties. Under the IRS streamlined procedures for foreign accounts, taxpayers with assets abroad can pay what they owe and meet their reporting obligations through a simplified process, provided their lapse was accidental.
To learn more about whether you qualify for these procedures and how you can use them to report cryptocurrency and other assets, please don’t hesitate to contact me or one of my colleagues at ALLURE International Tax Consulting. We are here to assist with all of your tax needs and questions.