Whether this is the first time you’ve heard the term cryptocurrency or you’re a crypto-connoisseur, this is relatively new territory – and you’ll want to understand precisely how this new currency can affect your expat taxes. What exactly is cryptocurrency? Is it an investment? Is it legal tender? And, how does the IRS treat cryptocurrency? What should I do to prepare before the end of 2018? If you’ve wondered about these questions, look no further for the answers!
What Is Cryptocurrency?
Simply put, cryptocurrency is a virtual form of payment that can be made directly to the recipient and replaces traditional currencies like credit cards, cash, and checks. That means no bank middleman, no transaction fees, and transactions can be anonymous. Many people who engage in virtual currency transactions do so to simplify international payments. Others wish to take advantage of the cost-savings in transferring the currency, which is a money-saver since cryptocurrency is not tied to any country or currently subject to regulation.
While multiple types of cryptocurrencies are in use, you may already be familiar with Bitcoin, the best-known form of virtual currency. In fact, Bitcoin is now widely accepted by major online retailers, including Overstock.com and Microsoft.
Investment Versus Currency
The IRS has established guidance on cryptocurrency classification: it is a capital asset – not a currency – making it more akin to stocks than cash. Since it is a capital asset, your gains are taxable, but you will only owe taxes when you sell your cryptocurrency. You won’t need to report your cryptocurrency on your US Federal Tax Return unless you decide to sell. If you choose to sell, you will use certain capital gains rules if you’ve held the stock for more than a year. Since cryptocurrency works a lot like property, whenever you exchange the currency, it could be considered a taxable event, so only do so when absolutely necessary.
Do I Need to Disclose Cryptocurrency Transactions?
Yes, virtual currency transactions need to be reported on your income tax return. A rumor has spread about the IRS implementing a disclosure program similar to the OVDP, which closed in September of 2018. But, a virtual currency disclosure program is nothing more than a myth, and IRS officials have confirmed that there are no plans to implement one.
What About FBAR and FATCA?
FBAR (Foreign Bank Account Reporting) and FATCA Form 8938 are additional reporting requirements expats sometimes face if they meet the thresholds. Cryptocurrency is still in a gray area for these two reporting obligations, but the most cautious approach is to report them if the crypto accounts meet the existing limits. An FBAR reporting requirement is triggered if you have more than $10,000 in all of your offshore accounts added together – so, simply include cryptocurrency in this calculation. A FATCA Form 8938 requirement is triggered for those living abroad when the total value of their assets is more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year for single filers; those amounts are doubled if you are filing as a married couple.
How to Prepare for the End of the Year
If you have cryptocurrency, the first step in year-end prep is to calculate your gains from the cryptocurrency. The cryptocurrency market has experienced widespread losses this year, so if you’re in the category of folks who encountered losses, make sure to sell the losing positions and write those off to help offset other capital gains you may have. Plus, if your capital losses exceed your capital gains for the entirety of 2018, you have a carryover loss, meaning you can apply that loss toward capital gains in upcoming tax years – but keep in mind, this does not work retroactively.
What to Do If You’ve Never Filed
If you’ve never filed your expat taxes, you can still get caught up with the Streamlined Filing Procedures, an amnesty program that the IRS offers that helps expats get caught up penalty free! If you did file but forgot to disclose your cryptocurrency earnings, you will need to file an amended return. If you missed the final deadline and are only one year behind, we encourage you to file as soon as possible and avoid penalties. Regardless, Greenback’s accountants have specialized expertise in helping expats become compliant with ease.