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Do Americans Abroad Pay U.S. Taxes on Cryptocurrency Gains
Do Americans Abroad Pay U.S. Taxes on Cryptocurrency Gains
In the past several years, the Internal Revenue Service has significantly increased enforcement of cryptocurrency-related tax matters. That is because the U.S. government is concerned that taxpayers are not properly reporting the income from their cryptocurrency gains and other types of cryptocurrency transactions such as mining, staking, and exchanges. This has led to the IRS issuing subpoenas to various exchanges such as Coinbase and Kraken in order to get information regarding taxpayers who may be generating income while operating on the exchanges but not reporting to the US government. The question then becomes whether Americans are broad and are required to pay US taxes on cryptocurrency gains.
Overseas Crypto Gains and Worldwide Income
From a baseline perspective, the United States taxes individuals on their worldwide income. Therefore, if a taxpayer resides overseas outside of the United States and generates crypto gains, those gains would still be taxable in the United States. For example, if David is an American abroad who purchased cryptocurrency for $100,000 and then sells it for $250,000, David has to pay capital gains tax on that $150,000 gain. Depending on which tax bracket David is in and whether it is a short-term capital gain or long-term capital gain will impact the overall tax liability. Whether the crypto is on a U.S. or foreign exchange does not impact the fact that the income is taxable.
Treaty Election or Substantial Presence
Some taxpayers who live abroad may be able to avoid paying cryptocurrency tax gains by either qualifying as a foreign resident under the tax treaty or the closer connection exception to the Substantial Presence Test (or other exceptions/exclusions to substantial presence). Taxpayers who want to pursue this option should know that they will have to file a form 8833 treaty election or form 840 slash 8843 for exceptions to the substantial presence test.
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