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.
An extension to tax filing — which moves your due date from April 15 to Oct. 15 — is free for the asking. Just note that the six-month extension does not extend the payment date. It is tempting to succumb to the allure of the extra months, but do you increase your odds of audit? There are differing views about what prompts an audit, but there is no data suggesting that tax returns filed on extension are more likely to be audited.
If anything, I would argue that filing on extension may actually decrease your audit risk. After all, many returns filed right at the deadline are filed in haste, some carelessly, and that can bring on an audit. Extensions can allow time to gather records, consider reporting alternatives, and get professional advice. After all, tax returns must be signed and filed under penalties of perjury, so it’s best to file accurately so you don’t have to amend later.
Justin Wilcox, partner at FML CPAs: You may be able to get out of taxes under the foreign earned income exclusion if your income is foreign-sourced and you spend fewer than 35 days annually in the United States.
If you worked overseas as a U.S. citizen in 2023, you can potentially exclude up to $120,000 in wages from your federal wages — plus a housing exclusion, the amount of which can vary from country to country. You don't necessarily have to pay any taxes abroad to take advantage of this. The rule is for income tax, but if your employer is a foreign employer, you may also be relieved from social security tax.
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This exclusion is available if you meet a "tax home test" — which requires you to have a regular place of business or employment in a foreign country and no U.S. abode— in addition to meeting a second “residency” requirement. For that, you have two choices – the physical presence test or bona fide residency test.
If you spent 330 full days abroad during any period of 12 consecutive months, you meet the “physical presence” test. It doesn’t need to line up perfectly with a calendar year, but you could end up losing part of the $120,000 limit depending on how much “qualifying period” is in your calendar year. This benefit could work in nearly any foreign country or foreign territory, even those with no income tax, but neither Cuba, the Antarctic, nor U.S. territories. If you become a resident in a U.S. territory, other exclusions may be available.
Bonafide residency, on the other hand, means you were a resident of a foreign country for the entire calendar year outside the United States. Note that claiming to be a nonresident in that country and paying no tax abroad could together result in not receiving a U.S. tax benefit. It’s complicated to meet the “bonafide residency” test and much clearer when you meet the “physical presence” test.
Crystal Stranger, CEO of Optic Tax: Don’t confuse the foreign earned income exclusion with the foreign tax credit.
My husband and I take advantage of the FEIE personally. We are outside the United States for at least 330 days a year — we split time between Costa Rica, South Africa and traveling, but we still legally have tax residency only in the US.
But don’t get the FEIE and Foreign Tax Credit (FTC) confused. The FTC offsets U.S. taxes with foreign taxes paid, and is frequently used both by U.S. residents and expats. On the expat side, if one has relocated to a high tax country, it is good to first check if the FTC will wipe out U.S. taxes fully, as if it does then there often in practice is a lower overall tax position when living abroad than using the FEIE because of how the FTC and FEIE are calculated.
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Once you have claimed the FEIE you cannot switch back to using the FTC without forfeiting the right to use FEIE for a set period of time in the future. However, if you start with FTC you can always change to FEIE without any penalty, and the FTC amounts are normally higher than U.S. tax — so a carryover accumulates which is beneficial if US tax rates increase in the future.
When you’re looking for an accountant, keep in mind that most tax accountants don't deal with international tax issues — even most IRS agents do not. There is actually a separate division for it at the IRS, and only the most experienced agents are in that division. It’s a complicated subject, it is frequently misunderstood and there is tons of misinformation online.
Tyler Menzer, CPA: Think twice before using the defaults on online tax-preparation software.
With crypto at historic highs, many people may be looking to minimize gains — but may end up paying more taxes in the process. Most online tools to help taxpayers calculate their cryptocurrency gain use the highest-in, first-out (HIFO) method. This means that your crypto with the highest basis will be sold first, reducing the amount of gain.
Although the amount of income you put on your return is smaller, it can actually result in paying higher taxes. In the U.S., long-term gains — crypto held for more than one year — are taxed at lower rates than gains on crypto held short-term. Taxpayers can choose 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 may be 0%. Even for taxpayers in the highest tax brackets, it is better to recognize $184 of long-term gain vs. $100 short-term gain.
Ultimately, selling long-term assets can save between 30-100% of tax compared to short-term assets.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.