Greenback makes life better for Americans living abroad and aims to take away the anxiety and hassle of helping US expats become and stay compliant with their US taxes while overseas. Greenback understands that filing US taxes while living abroad can be daunting and Greenback was founded on the belief that it doesn’t have to be this way. Greenback is proud of helping people navigate a..
Thank you to everyone who participated in this year’s US Expat Opinion Survey. Now that it’s over and the results have been collected , we want to share some of the most important insights you shared. From government representation to potential changes to the tax laws, take a moment to review this important information in our infographic!
Behind on Your US Expatriate Taxes? Greenback can help get you caught up
This year’s survey discovered that nearly half of expats were unaware of the Streamlined Filing Procedures, an IRS amnesty program that allows certain expats to become tax compliant minus the penalties. 20% of expats said they would like to use the procedures to get caught up. If you’re part of that 20%, get started with Greenback today!
The Office of the National Taxpayer Advocate, an independent organization within the IRS that works to safeguard taxpayer rights, submits semiannual reports to Congress, and the 2019 National Taxpayer Advocate Midyear Objectives Report to Congress is now available. This is one piece of news you don’t want to skip because, historically, the National Taxpayer Advocate has addressed issues of unfairness for all American taxpayers. But the report also addresses expat tax issues like whether or not you can get a passport when you’re behind on taxes. Since expat tax issues don’t often get a lot of traction, these reports are essential to keep up on. So, skip the hundreds-of-pages-long report and read our summary for expats instead.
What Does the Recent Report Focus On?
The National Taxpayer Advocate Midyear Objectives Report starts off by talking about how American taxpayers’ trust has been eroded by poor service from the IRS, and worse yet, there are no current plans to fix this issue. So, the Taxpayer Advocate Service (TAS) is developing an electronic tool to help guide taxpayers through the complicated American tax process.
Other areas of current focus include:
Counseling the IRS to reconsider its position on how the Religious Freedom Restoration Act is currently being applied (short version: it excludes the Amish and other religions from using child tax credits),
Helping identify at-risk taxpayers experiencing economic hardship so that they may receive more assistance throughout the taxpaying process,
Advocating for ways to strengthen Earned Income Tax Credits, and
Designing sample notices for the IRS to make American taxpayers more aware of their rights and help reduce the burden that paying taxes causes some Americans.
The 2019 National Taxpayer Advocate Midyear Objectives Report: Does It Tackle Expat Tax Issues?
The National Taxpayer Advocate mentions a newly created concept, the Taxpayer Anxiety Index, to help the IRS structure its taxpayer interactions. Of all American taxpayers, expats may be the best acquainted with taxpayer anxiety. But, that aside, there are only two areas that concern the majority of expats this time.
Area of Focus #10 in the report is geared toward helping taxpayers whose passports are affected by their tax liability understand their rights. According to the National Taxpayer Advocate Midyear Objectives Report, the four rights currently being impacted by the seizure of passports are the right to be informed, the right to challenge the IRS’s position and be heard, the right to retain representation, and the right to a fair and just tax system. An important takeaway for expats from this part of the report: if your passport has been seized due to your tax liability, contacting the TAS is a good idea. They might be able to help. In addition to helping taxpayers on a case-by-case basis, the TAS has other initiatives to address the negative impact of passport revocation, like meeting with the Department of State to discuss ways to alleviate the burden this puts on expats.
Area of Focus #12 in the report seeks more clarity and certainty from the IRS’s voluntary disclosure program. You may recall that, in 2018, the IRS terminated the Offshore Voluntary Disclosure Program and recently developed a new kind of disclosure program. Currently, the definition of willfulness – a big factor for which disclosure program you are allowed to use – is somewhat in the eye of the beholder, and that beholder is the IRS. If expats were unaware of their tax-filing requirements but still believe their behavior could be misconstrued as willful, they may choose to use a voluntary disclosure program to avoid the risk of further scrutiny by the IRS. When they do disclose, they must choose between paying penalties meant for tax-evading delinquents and trying to demonstrate their innocence without the typical safeguards. The TAS is hoping to get a firm explanation of which taxpayers should use which disclosure program and why.
What Does This Mean for Expats?
Expats will be hoping for a narrower application of the passport revocation process and more clarity on the voluntary disclosure programs, but that will only happen if the IRS heeds the latest TAS report. For broader changes to occur, Congress would need to take up these issues and enact some tax laws that are fairer for expats. Luckily, some Congress members have been listening, and slowly, they are taking action.
It’s one of the most important times of the year at Greenback, as we share the results from our 2019 US Expatriate Opinion Survey! But before we dive into the most significant findings from this year’s survey, let’s take a look at recent trends, what the survey accomplishes, and why it’s so important.
Greenback’s Annual US Expatriate Survey
Each year, Greenback studies the expat community’s opinions on taxation, citizenship renunciation, and more. Since expats are often left out of American politics as soon as they move abroad, our survey is one way to include them and broadcast their opinions worldwide. Our survey results are picked up by multiple media outlets each year, and participating in the survey is an excellent way for expats to advocate on behalf of their demographic.
Expats banding together and sharing their opinions has already started to have an impact. In France, Accidental Americans have taken legal action based on the discriminatory impact FATCA has on expats. And politicians have taken notice, as is evident by the introduction of the Tax Fairness for Americans Abroad Act.
Last year, Greenback asked expats about their view on political issues like immigration reform, healthcare, and gun control, and which of those social issues concerned them most. Expats agreed that gun control was the most important, and wanted to see more regulations in place for Americans.
The biggest takeaway from this year’s survey is twofold: US expatriates want change, but as for the changes currently looming, expats are unsure how they will be affected. Exhibit A is the Tax Fairness for Americans Abroad Act. Perhaps the most shocking finding was that 74% of expats surveyed had never heard of the Tax Fairness for Americans Abroad Act of 2018. Congressman George Holding, a US Representative from North Carolina introduced this bill in late 2018. Also known as H.R. 7358, this bill seeks to end citizenship-based taxation.
Next up is the tax reform. 54% of expats surveyed did not know if they would pay more or less in taxes post-reform. And, 58% were not confident in their understanding of how tax reform impacts them.
Other key findings include:
71% of US expatriates do not feel they should be required to file US taxes while living abroad, up 4% from 2018.
7% of expats did not file a tax return last year.
89% of expats believe that they are not fairly represented by the US government, rising 3% over 2018.
The first thing on expat wish lists is the repeal of citizenship-based taxation. 49% of expats feel that this is the chief way the US government could help expats.
CNBC shared exclusive coverage of this year’s survey findings, where they addressed the key issues Americans abroad voiced, including citizenship renunciation, FBAR, tax compliance, and more.
Get Caught Up on Your US Expatriate Taxes, Penalty-Free
This year’s survey discovered that nearly half of expats were unaware of the Streamlined Filing Procedures, an IRS amnesty program that allows certain expats to become tax compliant minus the penalties. 20% of expats said they would like to use the procedures to get caught up. If you’re part of that 20%, get started with Greenback today!
Greenback Expat Tax Services is more than just an award-winning international tax provider; we’re also an expat advocacy community that brings awareness to issues that American citizens living abroad experience. So, if you’re shopping around for a team of expat-specialist accountants who are regarded as experts in their field, find out why expats choose Greenback Tax Services to complete their taxes year after year.
Introduction to Greenback Tax Services
Greenback was founded back in 2009 by two expats frustrated by the process of finding a tax provider who understood the additional requirements and nuances of tax law that affect expats. They needed accountants who could understand the differing deadlines, figure out tax treaties and Social Security Totalization Agreements to avoid scenarios of double-taxation, and who offered upfront pricing so that no surprises were included on their tax bill.
After wrestling with the tax process with no solution in sight, Carrie and David McKeegan decided it was time to start their own company. A decade later, Greenback Tax Services is one of the fastest growing companies in America, and we’ve refined the process to make it as easy as possible. From our cutting-edge platform that was entirely created based on expat feedback, to our team of Customer Champions ready to answer your questions almost faster than you can come up with them, we’ve made every part of tax season painless.
Who We Help
Greenback Tax Services not only specializes in expat taxes—we only do expat taxes. Expats are not a niche branch of our services; it’s our whole operation. We’ve filed 28,000 tax returns for over 9,300 expats in over 214 countries around the world, and our customers come back every single tax season because we truly care about the expat tax experience.
Services We Offer
From Federal and State Tax Returns to complicated self-employment or international business forms, Greenback has seen the most technical of expat tax situations through to completion. You’ll never have to worry that your accountant is forgetting credits and deductions that could make the process less expensive for you, or that your accountant has not been briefed on all the latest expat tax news, regulations, and changes. Check out the abbreviated list of services we offer below:
For expats who are just now realizing they need to file taxes, we have a few services that can help them get caught up, no problem. Only one year late? Our late tax prep package will get you caught up in no time at all. If you’re at least three years behind, our Streamlined Filing Package helps expats who didn’t know about the tax-filing requirements become completely tax compliant without any penalties.
We offer consultations for expats who just need some reliable tax advice. Perhaps you are considering buying real estate abroad, want someone to review employment contracts, or are wondering how to plan for your retirement in a brand new country. Chat with our experts, and you’ll have all the information you need to make your decisions.
Expats often need to file annual FBARs (Foreign Bank Account Reports) to report overseas financial accounts. Anyone with more than $10,000 in their aggregate offshore accounts will need file every year. Our flat-fee FBAR filing ensures you don’t encounter any of those steep penalties.
If you have foreign assets like stocks, securities or interest in foreign accounts that exceed the IRS thresholds, you’ll be on the hook to file FATCA Form 8938, too. Luckily, our accountants have dealt with nearly every FATCA situation imaginable and can make getting caught up a breeze.
Small business owners, we’ve got you covered, too. Greenback accountants can file the forms you need so that you don’t need to worry that you’ve missed a form or schedule. Our small business tax prep is great whether you run an LLC, partnership, corporation, or S corporation.
Have a scenario you don’t see listed here? Chances are, you’ll find it in the full list of services or our additional, specialty services. Our accountants live and breathe expat taxes, so no matter how uncommon your specific situation is, we can take care of you. They have seen it all, and they can make it easy for you.
In fact, not only are our accountants apprised of all the latest expat tax updates, but we pride ourselves on our massive, FREE library of educational materials for our expat community. Curious about the latest buzz in the Senate about expat taxes? We have a guide that you can download. Wondering how the tax reform has been affecting expats specifically? We have a guide for that, too. We also host numerous, free, live webinars throughout the year during which we answer the most pressing questions we regularly hear from expats.
“Greenback made filing my over due taxes as easy as possible.” – Tiffanie
“Fantastic! It was a quick service, professionally done, and the accountant was amazing!!!” – JHR
“I’ve been using Greenback for years now; they have consistently made the experience painless and quick!” – Charles
“I used Greenback Expat Tax Service last year and will continue to use their services. The agents are prompt, professional, friendly, patient and overall simply the BEST. I highly recommend their service.” – Montrel
Are You Tax Compliant?
If you’re not sure, get started today, and we can help you figure out exactly what you need to get compliant. We make the process hassle-free for expats all over the world, and we’re excited to show you just how simple expat taxes can be.
New Zealand is quite a popular destination for expats, and it’s easy to see why. People are drawn to the beauty of this small grouping of islands with its picturesque landscape. Not only that, but it’s considered to be a very safe country and has retained its membership of the UK Commonwealth and maintains close links with the United Kingdom. However, you may not be aware that American expats in New Zealand may be required to file a tax return with the New Zealand tax authority, known as the Inland Revenue Department (IRD).
The New Zealand Tax Year & Deadlines Are Different Than Those in the US
The New Zealand tax year is a fiscal one that runs from April 1st of one year through March 31st of the next, with a tax return deadline of July 7th if you file your own tax return. If you use a tax advisor known as a tax agent, you’ll have an additional 7 months to submit your return (or “lodge” it) to the Inland Revenue Department (IRD).
It may come as a surprise, but many people in New Zealand aren’t required to file tax returns at the end of the tax year at all. If your income is from salary, wages, benefits or taxable pensions, your tax will automatically be deducted under the PAYE (pay as you earn) system. This means when you get your weekly, or monthly pay, your tax has already been deducted from it.
You’ll only need to file an individual tax return (an “IR3”), if you earned income other than salary, wages, interest, dividends, and/or taxable Māori authority distributions. Other income includes:
Income from a taxable property sale
Self-employed or business income
Income from cash jobs or “under the table” payments
Income from an illegal enterprise
More than $200 of schedular payments (formerly withholding payments)
Estate, trust or partnership income
Distribution of income/loss from a look-through company (LTC)
Over $200 of overseas interest and dividends that did have tax deducted
Overseas interest and dividends that didn’t have tax deducted
Income without PAYE deducted, such as shareholder-employee salary or a claim received under a taxable loss of earnings policy
Allocated income from a portfolio investment entity that was taxed at a zero rate
Received portable superannuation or Veteran’s Pension (note that due to this late change the requirement to file an IR3 return is not shown in the 2010 IR3 return guide).
You’ll also need to file an individual tax return (IR3) return if you:
Have losses to claim or brought forward from the previous year
Have excess imputation credits brought forward from the previous year
Left or arrived in New Zealand part-way through the year
Are filing a return for a deceased person to the date of death (if there is a requirement to file a return for the income year)
Were declared bankrupt part-way through the year (if there is a requirement to file a return for the income year)
Changed your balance date part-way through the year
Received allocated income from a portfolio investment entity that was taxed at a rate lower than your correct rate
Choose to include dividends received from a portfolio investment entity listed on the New Zealand Stock exchange, in order to claim imputation credits.
The tax rates in New Zealand are as follows:
Up to $14,000
Over $14,000 and up to $48,000
Over $48,000 and up to $70,000
Remaining income over $70,000
Things to Know About Expat Taxes in New Zealand
If you’re a citizen or permanent resident of the US, you must file a US tax return each year, no matter what country you happen to live in at the time. While the US taxes the international income of all citizens and permanent residents who live overseas, fortunately, it does provide several provisions to help protect you from double taxation on your US tax for expats. These include:
Note that in addition to your US tax for expats, you may also be required to file an informational return on your assets held in foreign financial accounts called a Foreign Bank Account Report (FBAR), otherwise known as FinCEN Form 114.
The Tax Treaty Between the Us and New Zealand
The tax treaty in place between the US and New Zealand helps determine to which country different types of US tax for expats should be paid and at what point they should be paid. The purpose of the treaty is to ensure taxes are paid to the right country. Navigating the treaty on your own can be a bit complicated, so it’s a good idea to consult with an expat tax professional if you’re unsure of the requirements for your situation.
By planning ahead, you should be able to take advantage of the strategies above in order to minimize or eliminate your US tax obligation.
Just Moved Abroad and Need Help Understanding Your US Tax for Expats Obligations?
Our team of expat-expert CPAs and IRS Enrolled Agents are here to provide you with the knowledge and resources you need in order to fulfill your tax obligations with the IRS. Get started with Greenback today for the most hassle-free tax prep imaginable!
For US residents, self-employment overseas is not very different from self-employment stateside. Taxes become a bit more complicated in either scenario; so, find out what expats need to know before you decide to become your own boss.
Self-Employment Overseas: Tax Thresholds, Schedules, and Structures
For expats who are employees, the thresholds for being required to file an annual Federal Tax Return (even if you don’t owe!) are $12,000 for single filers, $24,000 for those who are married filing jointly, and just $5 for those married filing separately. But for self-employed expats, the threshold is $400, which is undeniably low.
In addition to your tax return, you’ll need to file a Schedule C or Schedule C-EZ for sole proprietorships. The Schedule C is how you report the profit or loss from your company to the IRS. Small businesses that incur less than $5,000 in operating expenses, used cash-basis accounting, did not have an inventory, and did not have a net loss may be eligible to file the Schedule C-EZ instead. But you may not use the Schedule C-EZ if you had employees, need to deduct business use of your home, have prior year unallowed passive activity losses from this business, or are required to file Form 4562 to report depreciation and amortization on the business.
Don’t forget: the way your corporation is structured will have an impact not only on the taxes you pay but also on which forms you’ll need to fill out. Foreign corporations may need to fill out Form 5471, while Foreign Partnerships are more likely to be on the hook for a Form 8865.
Additional Taxes Assessed
Since self-employment essentially means you are both employer and employee, you will be responsible for paying both parts of the Social Security and Medicare taxes that your employer typically withholds from your salary. The maximum amounts due change annually based on wage levels and price fluctuations, so be sure to check with the Social Security Administration to see the current thresholds.
Country of Residence
The country you currently live in has its own set of self-employment rules, too. You’ll want to investigate income tax, corporate taxes, Social Security (if your country of residence doesn’t have a Totalization Agreement in place with the US), and any other taxes, social programs, or fees that could reduce your bottom line.
Estimated payments may be in your future if your self-employment overseas has left you with a tax debt. Those who can reasonably expect to owe $1,000 or more to the IRS at the April deadline will need to file estimated payments on a quarterly basis. If you fail to do this, the IRS can assess an underpayment penalty on the balance owed. So, if you’re new to the self-employment game, estimating payments may be your safest bet in order to ensure you pay the least when tax season rolls around.
Greenback Can Make Self-Employment Overseas a Breeze
Greenback uses a flat-rate pricing structure so that you know what you’re paying up front and are not surprised by your bill. This comes in especially handy for self-employed expats, whose taxes are usually a bit more on the complex side. Get started with Greenback today!
If you feel overwhelmed thinking about the expat income tax deadlines, that’s perfectly understandable! Having to sort through and locate tax documents can be quite daunting. Furthermore, as expats, the typical end of year 1099s or W-2s, which summarize your tax data, are not generated by foreign countries. To make filing a little simpler, we have provided the following steps that will guarantee you’re ready to file.
Step 1: Locate Expat Income Tax-Related Documents
Income means more than just wages. Get the below figures ready well in advance, and you’ll be on your way to an effortless tax season.
Wages: Standard W-2s are not an option, but your paychecks can provide the supporting information needed to summarize calendar year wages and tax withheld.
Investment income: Summarize annual interest, dividends, and capital gains.
Rental income: A summary of your rental income and expenses will help provide accountants the data they need. If this was the first year you received rental income, specify the date you placed your rental property in service, the purchase price, and improvements of your rental property or any other equipment.
Business income: This can include an annual income statement, balance sheet, purchase or disposition of fixed assets, or office-in-home information
Other income: This includes documents showing retirement income, alimony, gambling income, and miscellaneous income.
Step Two: Find Your Deduction- and Credit-Related Records
These documents can help save you money on your tax liability, so being thorough will come in handy!
Foreign Housing Expenses: If your tax home is in a foreign country, and you qualify for the Foreign Earned Income Exclusion, a further deduction from your gross income is available for foreign housing expenses. Provide a list that includes reasonable expenses paid or incurred for housing in a foreign country.
Real estate and personal property tax records
Loan or mortgage interest statements
Childcare expenses, including name, address, and ID number (if applicable) of child care provider
Health insurance and medical expenses summary
Charitable contribution summary
Step 3: Collect Your Foreign Financial Reports
Foreign Bank Accounts: Foreign account information reporting may be required if you meet certain account balance thresholds. The following will be to ensure an accurate return:
Name and address of the financial institution
Highest account balance
Balance at the end of the year.
Joint ownership/signatory authority, if applicable
Foreign mutual funds: Disclose to your accountant any foreign mutual funds or ETFs held.
Foreign pensions: Depending on the nature of the pension and tax treaty provisions, additional information may be needed to report foreign pensions correctly. Ensure that pension data is provided at tax time.
Foreign gifts/inheritances: US persons who receive certain foreign gifts or inheritances, or who organize a foreign trust may have additional reporting requirements; be sure to inform your tax preparer if this applies to you.
Step 4: Gather the Remaining Miscellany
This step is easier than it sounds, especially if you are a Greenback client! We securely store your tax information, so it is at your fingertips next year – no re-entering data or searching for your old return.
Personal and dependent information, including dates of birth and ID numbers
Foreign country tax return
Prior year US tax return
By following these four steps, you’ll be setting yourself up for a stress-free tax season.
Greenback Experts Can Make This Your Best Tax Season Ever
Each year, our expat opinion survey shows that citizenship renunciation weighs heavily on the minds of expats everywhere, and the US taxation system is often cited as the reason. Renouncing US citizenship may seem like a good decision – especially if you have dual citizenship or have been living outside the US for several years and plan to do so indefinitely. By giving up your citizenship, you will not have to file the annual tax returns to declare your worldwide income to the IRS. However, if you are a US expatriate, consider the following reasons before you move forward so that you can be sure your decision is fully informed.
1. You’ll Be on the Hook One Last Time
Even though you will not have to file US tax returns in the future (unless you receive income sourced in the US), you will need to file a final tax return to report income and deductions from January 1 to the date of the oath of renunciation taken at the US Embassy.
2. You May Still Face a Hefty Tax Before You Renounce
Section 877A of the Internal Revenue Code, enacted in 2008 under the Heroes Earnings Assistance and Relief Act, establishes a stringent exit tax applicable to covered expatriates. What exactly is a covered expatriate? It’s an individual who meets any portion of a three-part test and who is renouncing their US citizenship after June 17, 2008. The three-part test requirements are met if any of the following are true:
Net Worth Test – individual had a net worth of $2 million or more at the time of renunciation
Tax Liability Test – individual had an average annual net income tax liability of more than $165,000 USD in the last five years ending before the date of renunciation
Compliance Test – individual failed to certify that they had complied with all US federal tax obligations for the last five years preceding the date of expatriation.
Exceptions to the exit tax apply to dual citizens who were born in and continue to live in the country of their other nationality and to citizens who did not live in the US for more than 10 years before the age of 18 ½ years.
3. Every US Expatriate Will Be Charged a Fee
There is a fee to give up your US citizenship! The US government charges a $2,350 fee to relinquish US citizenship. And other tax considerations may apply in specific situations, so we advise that you discuss your specific circumstances with an experienced expat tax accountant so that you have all your bases covered.
US Expatriate Tax Compliance Is Easier Than You Think
Whether or not you decide citizenship renunciation is the best decision for you, you’ll need to be up to date on your expat taxes to proceed. Let us do the heavy lifting so that you can rest easy that your taxes are accurate. Get started now!
One of the most popular, yet often misunderstood, financial topics of the past few years have been the rise of the so-called virtual currency. From Bitcoin to Zcash, including a myriad of other similar offerings, cryptocurrencies have become all the rage. Yet, if the virtual currencies themselves are shrouded in a bit of mystery to most, it stands to reason that taxation for those involved is an even bigger enigma.
What Exactly Is Virtual Currency, and Why Do Some Choose to Use Them?
From a traditional standpoint, currency is understood to be physical currency (sometimes referred to as Fiat currency), which is the standard coin and paper money issued by a country or union and is used and accepted as a medium of exchange. However, currency can also be digital, such as credit cards which have stores of value. Virtual currency, in contrast, is a medium of exchange, but is not issued by any country or union.
While uses of virtual currency vary, the primary reasons individuals choose to utilize them are to avoid fees, for investment purposes, allowing banking for unbanked populations, and as an alternative to a national currency.
Are There Different Types of Virtual Currencies?
Yes. In general, there are two types of virtual currencies, nonconvertible virtual currency, and convertible virtual currency. Nonconvertible virtual currency is intended to be used in a domain or digital environment, and cannot be exchanged for ordinary, traditional currency. A way to think of them are online games where the currency is used to purchase goods or services but is confined to that platform. In contrast, convertible virtual currency is a virtual currency that has an equivalent value in real (“fiat”) currency that it can be exchanged for. Bitcoin is the biggest player in this market, but with Facebook’s most recent announcement introducing a crypto-based payment system called Libra, it will be interesting to see what comes in the months and years ahead. Convertible virtual currencies are also called “cryptocurrency,” which is a term derived from the software-aided cryptography used to control the issuance of new units of currency and to secure and control transactions.
How Does the IRS Treat Virtual Currencies for Tax Purposes?
Needless to say, the Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay for goods or services or held for investment. Ironically, for federal tax purposes, virtual currency is treated as property, and general tax principles applicable to property transactions apply to transactions using virtual currency. A potential benefit to this is that, since virtual currency is not treated as currency, it cannot generate foreign currency gain or loss (so-called “Forex” gains and losses) for US federal tax purposes.
However, the following points should be taken into consideration when dealing with virtual currencies:
A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in US dollars, as of the date that the virtual currency was received.
The basis of virtual currency that a taxpayer receives as payment for goods or services is the fair market value of the virtual currency in US dollars as of the date of receipt.
For US tax purposes, transactions using virtual currency must be reported in US dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in US dollars as of the date of payment or receipt.
If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
The character of a gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.
When a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.
If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.
Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in US dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.
The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.
A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on Form 1099-MISC should be reported using the fair market value of the virtual currency in US dollars as of the date of payment. The payment recipient may have income even if the recipient does not receive a Form 1099-MISC.
Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property.
Prior to the Tax Cuts and Jobs Act (TCJA), some taxpayers took the position that the exchange of one type of virtual currency for another type of virtual currency was a like-kind exchange subject to Sec. 1031. However, the TCJA limited like-kind exchanges under Sec. 1031 to exchanges of real property that is not primarily held for sale, in general, for exchanges completed after Dec. 31, 2017.
Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties. In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties. However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.
Are There Specific Impacts of Virtual Currencies When It Comes to Expats?
Although the general tax treatment of virtual currencies has an impact on all taxpayers who hold them, expats must consider where their virtual currencies are held in foreign accounts and therefore, subject to foreign account reporting. A digital wallet that holds cryptocurrency is likely considered an account for foreign information reporting purposes. To reinforce international tax compliance, the IRS may require digital wallet owners to comply with FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act) reporting. In general, it is best to include digital wallets held overseas in these information reports to avoid possible penalties and start the running of the statute of limitation.
Want to Know More About How Virtual Currencies Could Affect You?
Greenback specializes in US expat taxes and can help you navigate all the complexities that can go along with becoming or staying compliant. Located all over the world, our team of experts are here to help get your questions answered. Just reach out and let us know how we can help with your specific situation.
The Foreign Tax Credit is one of the single most important things for an expat to know. When submitting your Federal Tax Return, you’ll want to send the Form 1116 along with it. And in order to qualify, you’ll need to attach a series of documents explaining how you reached certain conclusions, which we’ll call the Form 1116 explanation statement, from here on out. Find out what kind of Form 1116 explanation statements the IRS is expecting, and how to correctly document everything necessary to be eligible for the Foreign Tax Credit.
When Are Form 1116 Explanation Statements Necessary?
Several different situations require explanation statements to the IRS. In fact, depending on your circumstances, you may need statements for the following:
Alternative basis compensation source statement
Election to use exchange rate statement
Financial services active financing income statement
Foreign tax withheld on rents and royalties statement
Other currency tax paid statement
Other deductions not related statement
That’s a lot of statements. Luckily, only a few of these are routinely required.
For instance, in Part II of Form 1116, each taxpayer must submit a statement that shows how the tax credit was calculated. So, what does that look like? First, calculate the Foreign Tax Credit with the limitation guidelines. Your Foreign Tax Credit cannot exceed your total US tax obligation multiplied by a fraction. The fraction is your taxable foreign income divided by your total taxable income from US and foreign sources. To come up with those numbers, you have to use a conversion rate to get all figures to a common currency, so also attach a Form 1116 explanation statement that shows the converter you used, and the date on which it was determined. Oanda.com is an excellent source for reliable conversion rates. Then, also document the formula you used and all relevant amounts.
If you want to use the exchange rate on the date that you were paid, you can simply make that election on your Federal Tax Return. To do so, just attach your Form 1116 explanation statement explaining your preference to use the currency conversion on the date you were paid, and ensure that your taxes are filed by the deadline.
Foreign Tax Redeterminations and Form 1116 Explanation Statements
If you claim to have paid foreign taxes and then receive an unexpected refund for any part of those taxes by the foreign government, you will need to issue an amended return recalculating your Foreign Tax Credit. In this case, not only would you file a 1040X, but you will attach a Form 1116 explanation statement that includes all necessary information for the IRS to redetermine your US tax liability for the applicable tax years. The IRS will expect your name, address, and taxpayer identification number, the tax year this info will affect, the dates the foreign taxes were accrued and paid, the amount paid and the currency conversion used. They will also require all the necessary information to determine interest due.
Greenback Can Help You File Form 1116
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