Tax advisors share some tax-day tips for crypto holders

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Have you finished your 2023 taxes? April 15 was filing day in the United States, so to honor the day, we checked in with four tax professionals to get their best tips for American cryptocurrency holders and expatriates. 

Robert W. Wood, tax lawyer at Wood LLP: Feel free to file for an extension to Oct 15 — it doesn’t necessarily increase the likelihood of an audit.

A tax filing extension allows you to push back your deadline from April 15 to October 15 at no cost. However, keep in mind that this extension does not affect the date for paying your taxes. While it may seem appealing to have additional time, there’s no evidence that tax returns submitted on extension increase the likelihood of an audit. Opinions vary about what triggers an audit, but there is no solid data supporting this notion.

Filing for an extension might even lower your chances of being audited. Why, you ask? Because numerous returns filed at the last minute are often submitted in a rush and with carelessness. These hasty filings can trigger audits. However, extensions provide additional time to collect records, explore reporting options, and consult experts. Remember, tax filings require your signature under penalty of perjury, so it’s crucial to submit accurate information initially to avoid the need for amendments later.

Justin Wilcox, partner at FML CPAs: You may be able to get out of taxes under the foreign earned income exlif your income is foreign-sourced and you spend fewer than 35 days annually in the United States.

For U.S. citizens who worked abroad in 2023, they might be exempt from paying federal income tax on up to $120,000 of their wages, along with a housing allowance whose amount depends on the country. You don’t need to pay taxes abroad to qualify for this benefit. This exemption only pertains to income tax; however, if your foreign employer is responsible for your taxes, you could also be freed from social security tax obligations.

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If you have a regular business or work location outside of the U.S., and no U.S. residence, then you may be eligible for this exemption. To qualify further, you can either pass the physical presence test, which involves being physically present in the foreign country for a certain amount of time, or the bona fide residency test, which requires demonstrating that you have truly established a new life there.

If you have lived outside the United States for a total of 330 full days within any 12-month period, you will pass the “physical presence” requirement. This doesn’t necessarily need to align with a calendar year, but if some of that time falls outside your tax year, you may not be able to utilize the full $120,000 limit. This perk can be applied almost anywhere abroad or in foreign territories, including those without income taxes. However, Cuba, Antarctica, and U.S. territories are exceptions. If you become a resident of a U.S. territory, other exclusions may apply instead.

Instead of “Bonafide residency,” you can also refer to it as “genuine residence in a foreign country for the entire year.” This means that you lived in a different country for all twelve months without being a tax resident there. It’s essential to note that if you don’t pay taxes or claim nonresident status in that country, it may impact your eligibility for U.S. tax benefits. Meeting the “Bonafide residency” requirement can be complex, making the “Physical presence” test (living in a foreign country for a specific number of days) a clearer and more straightforward option to consider.

Crystal Stranger, CEO of Optic Tax: Don’t confuse the foreign earned income exclusion with the foreign tax credit.

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My husband and I make use of the FEIE on a personal level. We reside outside the United States for approximately 330 days annually, living between Costa Rica, South Africa, and traveling, while maintaining our legal tax residency solely in the US.

While the FEIE and Foreign Tax Credit (FTC) serve different purposes, it’s important not to confuse them. The FTC allows U.S. taxes to be reduced by the amount of taxes paid in a foreign country. Both U.S. residents and expats can benefit from this credit. For expats living in high-tax countries, it’s wise to determine if the FTC will eliminate all U.S. taxes. If so, the overall tax liability might be lower when residing abroad compared to using the FEIE due to their distinct calculation methods.

After obtaining the FEIE benefit, you’re unable to revert to using the FTC for a specified time frame without giving up your eligibility for FEIE in the future. On the other hand, beginning with the FTC enables you to transition seamlessly to FEIE without any consequences. Additionally, the FTC tax amounts are typically greater than those in the U.S., resulting in a carryover that can be advantageous should U.S. tax rates rise in the future.

When searching for an accountant, be aware that many tax professionals don’t handle international tax matters. This includes the majority of IRS agents. The IRS has a specific division for such complexities, accessible only to their most seasoned agents. International tax issues are intricate and frequently misunderstood, with an abundance of misinformation circulating online.

Tyler Menzer, CPA: Think twice before using the defaults on online tax-preparation software.

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At record-breaking crypto prices, some individuals might consider ways to lessen their profits; however, they could unwittingly increase their tax liability. Most cryptocurrency tax calculators employ the Highest in, First Out (HIFO) approach. This method sells the crypto with the greatest initial cost first, thus decreasing the total profit amount that is taxed.

In the US tax system, you pay lower taxes on long-term capital gains from crypto held for over a year compared to short-term gains. By using the specific identification method, taxpayers can sell their long-term crypto instead of their short-term holdings with higher tax rates. For some taxpayers, there’s no tax at all on long-term capital gains. Even for those in the highest tax brackets, recognizing $184 in long-term gains is preferable to $100 in short-term gains.

Ultimately, selling long-term assets can save between 30-100% of tax compared to short-term assets.

The content in this article serves for informational purposes only and should not be construed as legal or financial guidance. The perspectives, ideas, and viewpoints expressed are those of the author, and may not align with or represent the views and standpoints of CryptoMoon.

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2024-04-16 01:03