Cryptocurrency has transformed the global financial landscape, allowing people to conduct transactions, trade assets, and earn income across borders. For US expats, the rise of digital currencies introduces a complex tax situation. Since the IRS treats cryptocurrency as property, any transactions involving crypto can trigger tax obligations—even for Americans living abroad. Understanding how cryptocurrency affects US expat taxes is essential for avoiding penalties and optimizing tax liability.
1. US Tax Treatment of Cryptocurrency
The IRS considers cryptocurrency as property, meaning that crypto transactions are subject to capital gains tax rather than being treated as currency. This classification impacts how US expats report and pay taxes on their crypto holdings.
Taxable Crypto Transactions
The following activities are taxable events for US expats:
- Selling crypto for fiat currency (USD, EUR, etc.) – Capital gains tax applies based on the profit or loss from the sale.
- Trading one cryptocurrency for another – If you exchange Bitcoin for Ethereum, for example, you must report capital gains or losses.
- Using crypto to purchase goods or services – The difference between the purchase price and your original acquisition cost creates a taxable event.
- Receiving crypto as payment for services or employment – This is considered ordinary income and must be reported on your tax return.
- Staking and mining rewards – Earnings from staking or mining crypto are subject to self-employment tax in addition to income tax.
Non-Taxable Crypto Transactions
Some crypto-related activities are not taxable:
- Buying and holding crypto – If you simply purchase cryptocurrency and do not sell or exchange it, you do not owe taxes until a taxable event occurs.
- Transferring crypto between personal wallets – Moving crypto from one of your wallets to another does not create a taxable event.
2. How Cryptocurrency Affects US Expats’ Tax Filing
Since US citizens and green card holders must report worldwide income, cryptocurrency earnings and transactions must be reported to the IRS, even if they occur outside the US.
Reporting Crypto on Your US Tax Return
- Capital gains and losses must be reported on Form 8949 and Schedule D of your tax return (Form 1040).
- Crypto income (from mining, staking, or receiving payments in crypto) is reported as ordinary income on Schedule C if self-employed.
3. Foreign Bank Account Reporting (FBAR) & FATCA for Crypto
If you hold crypto in a foreign exchange or foreign custodial account, you may be required to report it under FBAR and FATCA:
- FBAR (FinCEN Form 114) – If the total balance of your foreign financial accounts (including crypto exchanges) exceeds $10,000 at any time during the year, you must file an FBAR.
- FATCA (IRS Form 8938) – If your total foreign financial assets exceed $200,000 (single filers) or $400,000 (married filing jointly) at year-end, you must file Form 8938.
There is still uncertainty about whether crypto exchanges qualify as “foreign financial institutions” under FBAR and FATCA, but staying compliant is critical to avoiding penalties.
4. How US Expats Can Reduce Crypto Tax Liability
Use the Foreign Earned Income Exclusion (FEIE) if you earn crypto as income
The FEIE allows eligible expats to exclude up to $126,500 (for 2024) of foreign-earned income from US taxation.
- If you receive crypto as salary or freelance income, you may be able to exclude it using FEIE, provided you meet the Physical Presence Test (330 days abroad) or the Bona Fide Residence Test.
- However, FEIE does not apply to capital gains from crypto trading, which means trading profits are still taxable.
Utilize the Foreign Tax Credit (FTC)
The FTC allows expats to offset US tax liability by claiming a credit for taxes paid to a foreign country.
- If you are taxed on crypto gains in your country of residence, you may be able to use FTC to reduce or eliminate US tax liability.
- The FTC does not apply to self-employment tax, which means crypto mining and staking rewards may still be subject to US self-employment tax.
Hold crypto for more than a year to benefit from long-term capital gains rates
- If you hold cryptocurrency for more than a year before selling, you will be taxed at long-term capital gains rates (0%, 15%, or 20%), rather than short-term capital gains rates (taxed as ordinary income).
- Long-term capital gains tax is generally lower than short-term tax rates, making it a more tax-efficient strategy for expats who invest in crypto.
Consider a Tax-Friendly Residency
Some expats move to countries with no capital gains tax on crypto to reduce their tax burden. Countries like Portugal, the UAE, and Singapore offer favorable tax treatment for crypto investors. However, as a US citizen, you must still report worldwide income to the IRS, unless you renounce US citizenship.
5. Common Mistakes US Expats Make with Crypto Taxes
Many US expats unknowingly violate tax laws when dealing with cryptocurrency. Some common mistakes include:
- Not reporting foreign crypto transactions – Even if a foreign exchange does not provide tax forms, US expats must still report transactions.
- Ignoring self-employment tax on mining and staking income – Mining rewards are considered earned income, making them subject to self-employment tax (15.3%).
- Forgetting about FBAR and FATCA requirements – Holding crypto in foreign accounts may trigger additional reporting obligations.
- Failing to track cost basis and transaction history – Without detailed records, it’s difficult to accurately report gains and losses.
For US expats, cryptocurrency can create complex tax challenges, but understanding IRS rules and implementing smart tax strategies can help reduce liabilities. Whether you’re trading crypto, earning it as income, or holding it in a foreign account, proper tax planning is crucial.
Since crypto tax laws for US expats are constantly evolving, working with a US expat tax professional can help you stay compliant while minimizing taxes. If you need assistance with your crypto-related tax filings, consider scheduling a consultation with us today.
