Do You Have to Pay U.S. Taxes on Cryptocurrency Gains if You Live Abroad?

You still need to pay U.S. taxes on cryptocurrency gains as an American living abroad. Because of that, expats need to learn the ins and outs of how crypto is taxed in the United States.

Generally, cryptocurrency gains can be subject to two taxes: short-term capital gains and long-term capital gains. Often, short-term capital gains, which are earnings on assets held for less than a year, are taxed at a higher rate than long-term capital gains. Calculating capital gains, especially if you’ve traded crypto or used it to pay for goods, can be confusing, which is why it’s wise to enlist a CPA for American expatriates to handle your taxes. In addition to paying taxes on cryptocurrency, expats will need to report foreign holdings and financial assets if they exceed a certain amount.

Our accountants can help you report your crypto gains properly to avoid unnecessary financial penalties from the IRS. To learn more about the CPAs for American expatriates at US Tax Help, call us today at (541) 362-9127.

Do I Have to Pay U.S. Taxes on Cryptocurrency Gains While Living Abroad?

As cryptocurrencies have skyrocketed and grown in popularity among investors worldwide, you may have been inclined to purchase some of your own while living abroad. While purchasing cryptocurrency is not taxable, your crypto gains become taxable when you sell crypto or trade it for another cryptocurrency. Not to mention, Americans have to pay taxes regardless of their residency, as long as they retain their citizenship. Generally, crypto-fanatic expats should be aware of short-term and long-term capital gains tax and the implications of each.

Short-Term Capital Gains Tax

Currently, the IRS views cryptocurrency as an asset and not cash. So, crypto gains from sales isn’t seen as income but as a capital gain. The tax associated with capital gains depends on how long you held the asset before selling. Expats who have held their cryptocurrency for less than a year before selling it can face short-term capital gains tax.

In the U.S., short-term capital gains are taxed at the by your ordinary income tax bracket. So, suppose you are in a higher tax bracket, even after taking advantage of all the tax benefits available to Americans living overseas. In that case, your cryptocurrency gains may incur up to a 37% tax, which is steep.

Long-Term Capital Gains Tax

Holding your cryptocurrencies for over a year before you sell them can reduce your tax liability even when you live abroad. Instead of being taxed on capital gains from cryptocurrency at your regular tax bracket, long-term capital gains tax is applied on a graduated scale that’s regularly adjusted. For example, in 2022, the tax rate for long-term capital gains from cryptocurrency will be at most 20%. Depending on your income and filing status, the tax rate may be 0% or 15%.

For long-term capital gains taxes to apply to your cryptocurrency gains, you will have to hold them for over a year. This can be difficult, especially if market trends indicate you should cash out or trade for another cryptocurrency. Discussing your options with a CPA for American living overseas is crucial, so you don’t incur a higher tax on crypto gains.

How to Calculate Cryptocurrency Gains for Your U.S. Taxes While Living Abroad

Let’s face it; cryptocurrency can be confusing. It’s part cash, part investment, meaning you can use it to pay for goods and services, and it can grow in value over time. Because of this, American expats need to understand how to calculate cryptocurrency gains when it comes to their U.S. taxes.

Say you purchase $20 worth of cryptocurrency, and six months later, the amount you’ve purchased is now worth $50. If you choose to sell those holdings or use them to make a purchase, your short-term capital gains would be $30. This is the portion that gets taxed, not the amount you spent on the crypto in the first place ($20).

Now, say you purchase $20 worth of crypto and choose to sell it two years later, when the fair market value is $800. The long-term capital gains would be $780 but taxed according to the graduated scale for long-term capital gains.

That being said, buying and selling isn’t the only way expats approach this digital currency. In some cases, you may choose to trade one cryptocurrency for another. Suppose you originally purchased $200 worth of one cryptocurrency, now valued at $1,000. If you choose to trade it for another cryptocurrency, your capital gains would be $800. How long you held the initial crypto you bought before trading it for another would determine whether short-term or long-term capital gains tax is applied.

Again, calculating gains can be confusing, which is why it’s wise to hire a CPA for American expatriates to handle your cryptocurrency gains reporting for your U.S. taxes.

Do Expats Living Abroad Need to Report Cryptocurrency Holdings?

Apart from paying taxes on cryptocurrency gains, expats may need to report their crypto holdings if living abroad. To do this, American expatriates will need to complete specific if their crypto holdings exceed a certain threshold.

If you acquire or hold your cryptocurrency in a foreign country or hold gains in foreign accounts, you may need to report that to the IRS. The following are the guidelines for reporting foreign financial assets, including crypto, using IRS Form 8938:

  • You’re an expat filing as single whose foreign financial assets exceed $200,000 on the final day of the tax year or $300,000 at any point during the tax year
  • You’re an expat filing as married, and your collective foreign financial assets exceed $400,000 on the final day of the tax year or $600,000 at any point during the tax year

The IRS requires expats to report their foreign financial assets for informational purposes, not tax purposes. That being said, failure to file Form 8938 can result in financial penalties from the IRS.

In addition, expats may have to report to the Financial Crimes Enforcement Network, FinCEN, if they are holding crypto gains in foreign bank accounts. Using FinCEN Form 114, U.S. citizens living abroad must report their aggregate holdings in foreign bank accounts that exceed $10,000. If capital gains from selling crypto are put into a foreign bank account, causing your aggregate foreign holdings to exceed $10,000, you will have to report such to FinCEN.

All of this reporting can get confusing, which is why hiring a CPA for Americans living abroad is crucial. As an expat, it’s necessary to report foreign holdings from crypto gains over a certain amount so that you don’t face financial penalties from agencies like the IRS or FinCEN.

Call Our CPAs About How to Pay Taxes on Cryptocurrency Gains

Even if you live abroad, you still need to know how to pay taxes on cryptocurrency gains in the United States. To learn more about the CPAs for American expatriates at US Tax Help, call us today at (541) 362-9127.