advertisement
advertisement
The Fast Company Executive Board is a private, fee-based network of influential leaders, experts, executives, and entrepreneurs who share their insights with our audience.

Financial advisors: Should clients living abroad report cryptos?

Cryptocurrency is a growing phenomenon that is here to stay, and the IRS is taking an ever-greater interest.

Financial advisors: Should clients living abroad report cryptos?
[fizkes/Adobe Stock]

Cryptocurrencies have been dominating headlines this year, with a host of new virtual currencies launched and a rollercoaster ride of value increases and decreases for crypto investors.

advertisement
advertisement

But many of the estimated 10 million Americans who live overseas aren’t investors or speculators; instead, they use crypto as a way of making and receiving payments internationally without incurring currency exchange fees. For financial advisory companies tasked with guiding these individuals, keeping up with seemingly constant changes can be a challenge.

AN EVOLVING PANORAMA

While crypto originated as a reaction to perceived central bank incompetence and instability following the 2008 financial crisis, 2021 was the year central banks stepped off the sidelines and started to try and take control of what they see as a potential haven for crime funding and tax evasion.

Different countries’ governments are taking different approaches, however. Some are considering launching their own digital currencies, with the aim of being able to better regulate them. El Salvador, meanwhile, recently became the first country to declare Bitcoin acceptable as legal tender.

advertisement
advertisement

The U.S. has also evolved its attitude toward cryptocurrencies this year. Since a 2014 IRS notice, it has treated crypto as property rather than currency. In the last year, however, it has begun to hint that this may change. For example, on December 31, 2020, FinCEN announced that crypto accounts held abroad will be reportable on Foreign Bank Account Report forms, alongside foreign bank, pension, and brokerage accounts (more about this in a minute).

DO AMERICAN CLIENTS LIVING ABROAD HAVE TO REPORT CRYPTOCURRENCY?

For now though, when and how crypto should be reported is clear.

In 2020, the IRS introduced a cryptocurrency disclosure question on Form 1040: “At any time [during the tax year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” All Americans must check this field if it’s applicable. If your client held crypto throughout the year that they had acquired previously, it doesn’t apply—but most receipts, exchanges, gifts, and sales of crypto must be reported.

advertisement

If the client received crypto as payment for work they did, the dollar value of the crypto when they received it is reportable and taxable in the U.S., the same as any other earned income. Once received, cryptocurrencies are considered assets, though.

Note that Americans living abroad can claim certain exclusions and credits when they file. As a result, most don’t end up owing any U.S. tax; however, they still have to file and report their worldwide income every year.

The other common time when cryptocurrencies must be reported in a tax return is when they are sold. As crypto is considered property, any gain made in their sale since purchase is considered in the annual U.S. capital gains tax calculations and may need reporting on Form 8949 and Schedule D. The exception is if they are sold after having been held for less than a year, in which case gains are taxed as ordinary income.

advertisement

If crypto is exchanged for goods or services, they are also considered to have been sold and will qualify as either income or toward the capital gains allowance. If they are exchanged for another virtual currency though, they are not.

Gifts of crypto, whether given or received, may need reporting. If your client gives gifts of crypto with a total value of more than $15,000 in a year, it should be reported on Form 709. If they receive crypto as gifts from a non-U.S. citizen totaling more than $100,000 (unless it’s from their spouse, in which case the number is $155,000), then they should report them on Form 3520.

FBAR AND FATCA REPORTING

advertisement

As mentioned previously, FinCEN recently announced that starting in tax year 2021, foreign-held crypto accounts will need to be reported on an FBAR (Foreign Bank Account Report).

There is currently no clear IRS guidance on whether crypto wallets maintained at a foreign exchange should similarly be reported on FATCA reporting Form 8938 along with other financial assets held at institutions abroad. It would be prudent to do so, though.

Cryptocurrency is a growing phenomenon that is here to stay, and the IRS is taking an ever-greater interest. For now, most Americans living abroad will only have to report crypto if they receive it as income, if they sell it, or as part of reporting their offshore accounts.

advertisement

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


Katelynn is a CPA, a partner, and COO at Bright!Tax Expat Tax Services, the award-winning U.S. tax provider for Americans living overseas.

advertisement
advertisement
advertisement