Did you complete your tax filing for 2023? April 15 was the deadline for filing taxes in the United States, so in honor of the occasion, we spoke with four tax professionals to gather their top tips for American cryptocurrency holders and expats.
Robert W. Wood, a tax lawyer at Wood LLP, advises not to hesitate in filing for an extension until October 15, as it does not necessarily increase the chances of being audited. While the extension grants an additional six months to complete your tax filing, it does not extend the payment due date. Some may worry that filing on extension raises the risk of an audit, but there is no data to support this claim. In fact, Wood argues that filing on extension may actually decrease the likelihood of an audit. Rushed and careless filings made right before the deadline can trigger an audit, whereas extensions provide more time to gather records, explore reporting alternatives, and seek professional advice. It is crucial to file accurately from the start to avoid the need for amendments later on.
Justin Wilcox, a partner at FML CPAs, points out that individuals who earned foreign income and spent fewer than 35 days per year in the United States may be able to avoid taxes through the foreign earned income exclusion. For U.S. citizens who worked overseas in 2023, they can potentially exclude up to $120,000 in wages from their federal taxes. This exclusion also applies to housing, with the amount varying depending on the country. It’s important to note that one does not necessarily have to pay taxes abroad to take advantage of this exclusion. Additionally, if the employer is a foreign employer, the individual may be exempt from paying social security tax as well. To qualify for this exclusion, a “tax home test” must be met, requiring a regular place of business or employment in a foreign country and no U.S. abode. Additionally, either the physical presence test or the bona fide residency test must be fulfilled.
The physical presence test is met if an individual spends a total of 330 full days abroad during any 12 consecutive months. This period does not need to align perfectly with a calendar year, but the amount of the $120,000 limit can be reduced based on the portion of the “qualifying period” within the calendar year. This exclusion applies to almost any foreign country or territory, except for Cuba, the Antarctic, and U.S. territories. If one becomes a resident of a U.S. territory, there may be other exclusions available. On the other hand, the bona fide residency test requires being a resident of a foreign country for the entire calendar year outside the United States. It’s important to avoid claiming nonresidency in the foreign country and paying no taxes abroad, as it could result in not receiving a U.S. tax benefit. Meeting the “bona fide residency” test can be more complex compared to the “physical presence” test.
Crystal Stranger, the CEO of Optic Tax, advises against confusing the foreign earned income exclusion with the foreign tax credit. She personally takes advantage of the FEIE by spending at least 330 days outside the United States each year, maintaining tax residency solely in the U.S. The FTC, on the other hand, offsets U.S. taxes with foreign taxes paid and is commonly used by both U.S. residents and expats. For expats residing in high-tax countries, it’s important to determine if the FTC can fully eliminate U.S. taxes, as it may result in a lower overall tax position compared to using the FEIE due to the calculation methods of both credits. Once the FEIE is claimed, switching back to the FTC is not possible without forfeiting the right to use the FEIE for a set period of time in the future. However, starting with the FTC allows for a later change to the FEIE without penalty, and the FTC amounts are usually higher than U.S. tax, resulting in a beneficial carryover if U.S. tax rates increase in the future. When seeking an accountant, it’s crucial to find one with experience in international tax issues, as it is a complex subject that is often misunderstood, with plenty of misinformation available online.
Tyler Menzer, a CPA, cautions against using the default settings on online tax-preparation software without careful consideration. With cryptocurrency reaching record highs, many individuals may be looking to minimize their gains but could end up paying more taxes as a result. Most online tools use the highest-in, first-out (HIFO) method to calculate cryptocurrency gains, meaning the crypto with the highest basis is sold first, reducing the overall gain. While this may result in reporting a smaller income on the tax return, it can lead to higher taxes. In the U.S., long-term gains from holding crypto for more than one year are taxed at lower rates compared to short-term gains. Taxpayers have the option to use the specific identification method to sell long-term crypto instead of short-term, higher-taxed crypto. For many taxpayers, the long-term capital gains rates can be as low as 0%. Even for those in the highest tax brackets, recognizing long-term gains can save between 30-100% of taxes compared to short-term gains.
It’s important to note that this article is for general information purposes only and should not be considered legal or investment advice. The views expressed by the author are their own and do not necessarily reflect the views of Cointelegraph.