In 2009, bitcoin—the first cryptocurrency—emerged and completely disrupted the traditional landscape of trading, investing, and exchanging money. Over the past decade, virtual currency has continued to gain traction and popularity. Today, it is common for investors to use a cryptocurrency broker to buy, sell, and exchange digital currency. Online brokers, such as Coinbase, TradeStation, and Etrade, handle thousands of virtual currency transactions every day.

It’s no surprise that the IRS has taken note of the increasing popularity of cryptocurrency. In some cases, the IRS has forced online brokers to release user information to ensure virtual currency owners are paying taxes on their virtual currency gains. If you are a virtual currency owner, it is important to understand the tax regulations surrounding this new form of money. If you aren’t careful, the IRS can gather information on your transactions from online brokers and use it to open an audit or criminal tax investigation.

If you are facing civil or criminal penalties from your virtual currency transactions, it is important to consult with an experienced tax attorney.

How is Virtual Currency Taxed?

Virtual currency is usually taxed as property, making it subject to the capital gains tax. In and of itself, purchasing virtual currency is not a taxable transaction. However, selling the currency or using it to make purchases constitute transactions that are taxed by the IRS. This means that virtual currency owners need to keep track of the market value of the virtual currency they own. This information can be found on virtual currency exchange and broker sites.

To calculate the capital gains tax you need to report on your tax return, you will subtract the price at which you bought your currency from the selling price. If you owned your virtual currency for less than a year before selling, you are eligible for a short-term capital gains tax, which is usually in the ballpark of your income tax rate. Virtual currencies that are held for more than a year will be taxed at the long-term capital gains rate, which is usually around 23 percent.

Virtual Currency and Exchange Websites

In the early days of cryptocurrency, the IRS hadn’t figured out how to accurately track virtual transactions made using cryptocurrency commodities. Since then, the agency has quickly learned how to track virtual currency to a high degree of accuracy. This is mainly a result of requiring virtual brokers to release information on their users’ transactions.

When the IRS obtains a court order that requires exchange sites to release user information, they can check a user’s tax returns to ensure they properly reported their capital gains. If the information doesn’t match, the IRS will most likely start an audit. When deciding whether to pursue civil or criminal penalties, the auditor will attempt to determine whether your inaccurate reporting was genuine oversight or willful.

As soon as you are informed of an IRS audit, it is imperative that you contact an experienced tax attorney. While the penalties of inaccurate reporting depend on the specifics of the situation, in some cases, you could face fines of up to $250,000 and jail time.

Consult a Skilled Tax Resolution Attorney

If you own, sell, and exchange virtual currency, the best way to avoid getting audited is to consult with an experienced tax attorney. At Morgan Sebastian Law, attorney Becky Sebastian is eager to help you navigate the complexities of your tax situation. We understand that accurately reporting capital gains tax can be a challenge, and we can help with that. Additionally, if you end up being audited by the IRS, she will work to mitigate the damage and protect your rights.

To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.

Many Americans choose to retire in warmer, more affordable countries. However, even if you haven’t set foot in the U.S. for years, you’ll still need to file an annual tax return with the IRS. Expatriates—commonly referred to as “expats”—usually have complicated taxes. To avoid dealing with the stress of the IRS, it can be very beneficial to work with a tax resolution lawyer. If you are an American that is living in or has retired to a different country, here is what you need to know about paying U.S. taxes while living abroad.

All American Citizens Must File Annual Tax Returns

Unfortunately, the IRS doesn’t care where you live. All U.S. citizens—regardless of where they may reside—are still subject to the jurisdiction of the IRS. Even if you haven’t lived in the U.S. for years, you still need to file a tax return and report all of your income to the IRS, including any money made in a different country.

While there are some tax exceptions for expats, most of the tax rules that apply to taxpayers living in the U.S. also apply to U.S. citizens living abroad. For example, expats are still expected to pay the same income tax rates as Americans residing within the U.S. As a result, you might have to pay a U.S. income tax rate on any money that you earned in another country.

How Expats Can Reduce Their U.S. Income Taxes

Although expats are required to pay U.S. income taxes, there are some exclusions they can claim to reduce their income taxes or, in some cases, eliminate them entirely. The foreign tax credit and “exclusions from income” credit are the two credits expats can claim on their tax returns. However, you cannot claim both and will have to choose which one you want to claim.

The Foreign Tax Credit

The foreign tax credit was created to minimize double taxation. Without it, U.S. citizens living in another country would end up paying income tax in the country they live along with U.S. income taxes. The foreign tax credit works by providing a tax credit for all income tax and excess profit tax you paid in another country.

Your foreign tax credit applies solely to the portion of your U.S. income tax that is attributed to your foreign income. To calculate this, the IRS will consider the amount of money you paid in foreign income tax and use a “limitation” factor in their tax formula.

In lieu of taking a foreign tax credit, you can choose to claim the money you paid in foreign income taxes as an itemized deduction on your Schedule A. However, it is usually advantageous for taxpayers to take the foreign tax credit instead.

The Exclusions From Income Credit

U.S. expats have the option to choose the “exclusions from income” credit over the foreign tax credit. This allows eligible expats to exclude certain things from their gross income, including:

  • Any foreign income that totals $105,900 or less

  • Foreign housing costs that are more than 16 percent—with a cap at 30 percent—of an expat’s foreign income. Self-employed expats are not eligible for the foreign housing exclusion.

Expats can choose to use either or both of these exclusions. The exclusions are available to every ex-pat—meaning if you are living in another country with a spouse, you are both eligible to claim the exclusions. In order to receive the exclusions from income credit, expats must qualify. To qualify, an expat must meet certain conditions:

  • They must be a U.S. citizen who has been a resident in a foreign country for a period longer than a tax year.

  • They must be a U.S. resident who is a citizen of a foreign country with whom the U.S. has an income tax treaty.

  • The must be a U.S. citizen who has been in a foreign country for 330 days or more during a one-year period.

Consult a Skilled Tax Resolution Lawyer

Choosing to retire in a different country should be an exciting choice. However, many expats are plagued by complex tax returns. As an expat, it can be hard to determine which of the two tax credits to choose for your individual situation. At Morgan Sebastian Law, our firm is eager to confront all the complexities of your tax issues. When you work with Attorney Becky Sebastian, you will experience compassionate attention that provides a sense of relief and peace of mind regarding your financial state.

To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.

The coronavirus pandemic has caused widespread financial insecurity. Many Americans have lost their jobs and many more lack certainty in their job stability. In March, lawmakers signed the federal COVID-19 stimulus bill, also referred to as the CARES Act (Coronavirus Aid Relief and Economic Security). Outlined in the bill are several financial relief measures aimed at helping Americans during the pandemic.

One of the benefits in the bill is an increased deduction rate for charitable donations. Under the new bill, Americans have increased provisions for charitable donations. However, there are a few caveats to be aware of. If your tax situation is complex, it is always best to consult with a tax resolution lawyer for guidance. Here is some valuable information about how to deduct charitable donations for your taxes.

The CARES Act and Charitable Tax Deductions

The CARES act increased the deduction percentage Americans could claim for contributions to public charities. Before the act, the limit on charitable deductions was 60 percent of an individual’s gross adjusted income. Under the new bill, lawmakers increased the limit to 100 percent of an individual’s adjusted gross income. The law also increased the corporate charitable deduction rate from 10 percent of a company’s taxable income to 25 percent.

While the law was created in the wake of pandemic-related financial insecurity, the new provisions are not limited to 2020 and will apply to all future tax years. The one drawback of the new law is that it only applies to cash donations. For example, if you donate stock, real estate, or any other non-cash items, these would not be eligible for the increased deduction rate.

How to Use the New Charitable Deduction Provisions

During the COVID-19 pandemic, many people who are in the financial position to give back are looking for ways to do so. Using cash to donate is one way to give back to your community. Another great option—specifically for investors—is to donate shares from your accounts or brokerage. Since you won’t have to pay capital gains tax on donated shares, it is a good strategy for lowering your tax bill.

Another creative way to capitalize on the new deduction rate is to redeem cash-back rewards on your credit card and donate the money. With this strategy, you are donating the “free money” gained from your credit card company to a charity. You can then get a tax deduction for your charitable contribution. This is a great way to give back and put some money back into your bank account at the same time.

How to Avoid Being Audited

While donating your money in the form of credit card rewards, stock shares, or cash is a great way to give back, you’ll want to avoid being audited. There are certain red flags that alert the IRS. If you are considering a charitable donation, here are some things to consider:

  • You cannot claim a deduction for any charitable donation without a written record of your contribution. You’ll need to submit a written acknowledgement or receipt from both yourself and the organization you donated to.

  • Make sure you donate to a public charity that is approved by the IRS. If you don’t, your donation won’t be eligible for a deduction.

  • Be sure to document all your donations throughout the year to ensure a smooth filing process.

Ultimately, the best way to avoid being audited is to educate yourself on the restrictions of charitable deductions and collect all documentation and receipts from your donations.

Consult a Skilled Tax Resolution Lawyer

Often, filing your taxes is a complicated process. The complex nature of the tax process lends itself to errors. If you have been audited by the IRS or are struggling with your taxes, you should consult with a skilled tax resolution lawyer. At Morgan Sebastian Law, attorney Becky Sebastian represents taxpayers before the IRS in all 50 states. Our firm has a proven track record of helping our clients navigate complex tax situations. To schedule a consultation with an experienced tax resolution lawyer, call (877) 223-6605 or fill out our online contact form.

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