Did you complete your 2023 tax filings? April 15 marked the deadline for filing taxes in the United States. To commemorate the occasion, we reached out to four tax professionals to gather their top tips for American cryptocurrency holders and expatriates.
Robert W. Wood, a tax lawyer at Wood LLP, advises that individuals can request an extension to file their taxes until October 15 without increasing the likelihood of an audit. While the extension allows for additional time to file, it does not extend the payment due date. There is no evidence suggesting that tax returns filed on extension are more likely to be audited. In fact, filing on extension may reduce the risk of an audit as it allows for more careful preparation and professional advice.
Justin Wilcox, a partner at FML CPAs, explains that individuals may be eligible for the foreign earned income exclusion if their income is sourced from a foreign country and they spend less than 35 days annually in the United States. U.S. citizens who worked overseas in 2023 can potentially exclude up to $120,000 in wages from their federal taxes. This exclusion also applies to housing, but the amount varies depending on the country. It is important to note that this exclusion is for income tax purposes only, and individuals working for foreign employers may also be exempt from paying social security tax.
To qualify for the exclusion, individuals must pass the “tax home test” by having a regular place of business or employment in a foreign country and no residence in the United States. They must also meet either the “physical presence test” by spending 330 full days abroad during a 12-month period or the “bona fide residency test” by being a resident of a foreign country for the entire calendar year outside the United States.
Crystal Stranger, CEO of Optic Tax, cautions against confusing the foreign earned income exclusion with the foreign tax credit. The foreign tax credit offsets U.S. taxes with foreign taxes paid and is commonly used by both U.S. residents and expatriates. Depending on the tax rates in the country of residence, using the foreign tax credit may result in a lower overall tax position compared to using the foreign earned income exclusion. It is important to understand the calculations and implications of both options before making a decision.
Tyler Menzer, a CPA, advises individuals to be cautious when using defaults on online tax-preparation software. Many tools calculate cryptocurrency gains using the highest-in, first-out (HIFO) method, which may result in higher taxes. Long-term gains (crypto held for more than one year) are taxed at lower rates than short-term gains. Taxpayers can choose to use the specific identification method to sell long-term crypto instead of short-term crypto to potentially reduce their tax liability. Selling long-term assets can save between 30-100% of taxes compared to short-term assets.
It is important to note that this article provides general information and should not be considered legal or investment advice. The opinions expressed by the tax professionals are their own and do not necessarily reflect the views of Cointelegraph.