An Offshore Crypto Tax Guide for US Citizens & Residents

An Offshore Crypto Tax Guide for US Citizens & Residents

An Offshore Crypto Tax Guide 

Over the past several years, the worldwide popularity of using cryptocurrency has expanded significantly. As a result, US taxpayers far and wide have invested in cryptocurrency. And, while cryptocurrency may not be taxable in all countries, in the United States most types of cryptocurrency transactions are both taxable and reportable. Common types of crypto transactions include:

• • Capital Gain

  • Exchanging Different Crypto Types

  • Earned Income

  • Staking Rewards

  • AirDrops

  • Hard-Forks (if new coins received)

  • Mining

For example, when a person buys and sells cryptocurrency, that is a taxable transaction. Likewise, if a taxpayer receives cryptocurrency as income for services rendered, that too is considered taxable income. Thus, one very important aspect of crypto transactions for U.S. persons with overseas crypto is that even if they are in a jurisdiction that may not tax cryptocurrency, chances are the transaction is taxable under U.S. tax law. Let’s take a look at five important facts about offshore cryptocurrency.

First, the U.S. Worldwide Income Rules Explained

Unlike almost every other country across the globe, the United States taxes individuals on their worldwide income. Therefore, even for Taxpayers who reside overseas and/or reside in the U.S. but engage in foreign crypto transactions, the baseline default position is that the transactions are taxable in the United States. This includes capital gain income, earned income, staking, mining, etc.

Foreign Crypto Account and Asset Reporting (FBAR, 8938, 8621)

In addition to having to report the income generated from offshore cryptocurrency, taxpayers are also required to report this information on various international information reporting forms. Whether or not the crypto is reportable will depend on the type of crypto and whether it is in an account, investment account, or hybrid crypto/cash account. If the crypto is reportable, it may be reportable in various international forms, such as the FBAR (Hybrid and investment accounts), form 8938, and Form 8621.

All Types of Crypto Income is Taxable

As mentioned above, it is very important for U.S. Taxpayers to keep in mind that the U.S. taxes most types of cryptocurrency transactions. Here are seven common types of income-generating crypto transactions.

• • • Capital Gain

    • Exchanging Different Crypto Types

    • Earned Income

    • Staking Rewards

    • AirDrops

    • Hard-Forks (if new coins received)

    • Mining

Kraken Audits are Coming

Recently, a court in California determined that the IRS has the right to enforce a subpoena against Kraken for them to have to provide the names and other information are more than 42,000 users. The purpose of this information for the IRS is to promote transparency and ensure that the taxpayers have properly reported their crypto and paid all necessary income and capital gains tax. As a result, taxpayers who are Kraken users should begin to prepare in case they become subject to one of these audits. And, f they are considering getting into compliance for previously unreported income or other disclosures — this may be a good time to consider the options.

Offshore Disclosure Options

For taxpayers who are out of compliance and reporting and paying taxes on their offshore cryptocurrency, the Internal Revenue Service has developed various amnesty programs to assist taxpayers with getting into compliance. Depending on the specific facts and circumstances — and specifically, whether or not the taxpayer is willful or non-willful — will help determine which of the international penalty relief amnesty programs they may qualify for.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.