Did you complete your 2023 tax returns? In honor of the April 15 filing deadline in the United States, we reached out to four tax professionals to gather their top tips for American cryptocurrency holders and expatriates.
Tax lawyer Robert W. Wood from Wood LLP suggests that individuals can request an extension to October 15 for filing their taxes without increasing their chances of being audited. While the extension grants an additional six months to file, it does not extend the payment due date. Filing on extension may even decrease the risk of an audit as it allows for more time to gather records, consider reporting options, and seek professional advice. Accuracy in filing is crucial to avoid the need for later amendments since tax returns must be filed under penalties of perjury.
Justin Wilcox, a partner at FML CPAs, advises that American citizens working overseas may be eligible for tax exemptions under the foreign earned income exclusion. If your income is sourced from foreign countries and you spend fewer than 35 days annually in the United States, you can potentially exclude up to $120,000 in wages from your federal taxes. Additionally, depending on the country, you may be able to claim a housing exclusion. It is not necessary to pay taxes abroad to take advantage of this exclusion. Wilcox explains that the “tax home test” must be met, which requires having a regular place of business or employment in a foreign country and no U.S. abode. Individuals can meet the residency requirement through either the physical presence test or the bona fide residency test.
Crystal Stranger, CEO of Optic Tax, emphasizes the distinction between the foreign earned income exclusion and the foreign tax credit. While Stranger and her husband personally utilize the foreign earned income exclusion by spending at least 330 days outside the United States, she advises against confusing it 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 expats. Depending on the tax rates in the country of residence, using the foreign tax credit may result in a lower overall tax position than utilizing the foreign earned income exclusion. Once an individual claims the foreign earned income exclusion, they cannot switch back to using the foreign tax credit without forfeiting the right to use the exclusion for a set period of time in the future.
When seeking an accountant, Tyler Menzer, CPA, suggests considering specialists in international tax issues, as many tax accountants and even IRS agents do not handle these matters. Menzer highlights the complexity and frequent misunderstandings surrounding international tax issues and warns against relying on misinformation found online.
Lastly, Menzer advises caution when using default settings on online tax-preparation software, particularly when it comes to calculating cryptocurrency gains. Many of these tools utilize the highest-in, first-out (HIFO) method, which may result in higher taxes. Instead, taxpayers can choose the specific identification method to sell long-term cryptocurrency holdings first, as long-term gains are typically taxed at lower rates than short-term gains. Selling long-term assets can potentially save individuals between 30-100% of taxes compared to selling short-term assets.
Please note that this article is for informational purposes only and should not be considered as legal or investment advice. The opinions expressed by the tax professionals are their own and do not reflect the views of Cointelegraph.