Understanding Bitcoin and How It Can Affect Expatriate Taxes

Expatriate Taxes and Effects of Bitcoin

Bitcoin has been around for several years now, but still hasn’t become very mainstream. Defining the term ‘bitcoin’ is a bit challenging – is it money? Is it some form of investment? The lack of clarity early on prompted the IRS to finally provide official guidance on how bitcoin will be treated when it comes to your expatriate taxes.

What is Bitcoin?

Launched in 2009 by an unknown individual who goes by the pseudonym “Satoshi Nakamoto,” bitcoin transactions are made without the bank middleman, there are no transaction fees and you aren’t required to give your real name in order to use it. Read more about the origin of bitcoin here. Bitcoin can make international payments extremely easy and inexpensive compared to the current alternatives, since they are not tied to any country or subject to regulation. The IRS has determined that for the purpose of expatriate taxes, bitcoin are actually considered a capital asset and not a currency, which means they could be described more like stock than actual dollars and cents.

IRS Classification of Bitcoin

Because bitcoin are considered to be a capital asset, your gains would be taxable on your expatriate taxes. If you purchased a bitcoin for $1000 and sold it for $1500, you’d need to pay taxes on your $500 profit. It’s worth noting that you will only owe taxes when you sell bitcoin, so you won’t need to report your bitcoin on your US Tax Return unless you decide to sell.

If you do sell your bitcoin, you can expect the taxes to fall under capital gains rules:

  • Sell after holding it for less than a year? The tax rate will be your personal income tax rate.
  • Sell after holding if for over a year? The tax rate will be 15 percent, the standard lower long-term capital gain rate.

Being Paid in Bitcoin

Nowadays, there are some employers who choose to pay their employees in bitcoin. Are you one of those employees? If so, you may be wondering how this could impact your expatriate taxes – here’s what you should know:

  • Your salary is counted the same as regular income, even if you’re paid with bitcoin.
  • After that, the bitcoin are counted as an investment. So, if you sell them later down the road for a gain, the extra money will be considered a taxable gain.

Bitcoin and Past Expatriate Taxes

The fact that the IRS only recently provided guidelines on the treatment of bitcoins does not exempt taxpayers from reporting capital gains from the past. So, if you made money previously off selling your bitcoin, you technically still owe expatriate taxes on that. To do so, you should file an amended tax return for all the years you made bitcoin income. Failing to take these requirements seriously could lead to tax penalties, so it’s a good idea to get caught up on these reporting requirements! If you’re unsure of where to begin, consult with an expat tax professional for advice. You can also learn more about getting caught up by downloading our guide to US taxes.

FBAR, FATCA, and Bitcoin

Whether taxpayers should report cryptocurrency on their Foreign Bank Account Reporting (FBAR) is a matter of some debate. If the account meets the $10,000 threshold, some experts are recommending that taxpayers take precautions and report it, since if they do not, they could be surprised with a charge of willful nondisclosure. If the IRS believes you have willfully hidden your offshore accounts, you could face penalties of $100,000, or 50% of what is in the account – whichever is greater! However, though some experts recommend only reporting bitcoin if it was stored in an offshore account for FBAR (FinCEN Form 114), you should definitely plan on reporting it via FATCA Form 8938.

Need to Report Bitcoin Earnings on Your Expatriate Taxes?

Our team of expat-tax experts can help you better understand and fulfill your tax requirements when it comes to bitcoin earnings and gains. Get started with us today for a hassle-free filing experience!

Originally published on August 11, 2017; updated on March 22, 2018.