Monday, October 30, 2017

Foreign Freelance Income & What Does Maradona Have To Do With That?

Diego Maradona. PC:
Just when I was planning on publishing my post on foreign free lance income & tax consequences- the big news headline of 2017 dropped! Today special prosecutor, Robert Mueller brought charges against Manafort & Gates for money laundering & foreign bank accounts among any other things. While those fire-works continue and you think that you may not be in the same league as them, let me assure you that many U.S. citizens who live abroad and have free lance income do not understand its tax implications. 

You may already be aware that US Citizens and Green Card holders are taxed in the United States on their worldwide income, regardless of where they live. Freelance income is reported on Schedule C, Profit or Loss from Business (Sole Proprietorship). "Ordinary & necessary" expenses related to this work can be deducted on the same Schedule C. The net income, that is gross minus the allowable expenses is then subject to tax. 

You may be able to avoid some or all of the U.S. Income Tax on this income, either through foreign tax credits (taxes paid to your resident country on this same income) or the foreign-earned income exclusion (by satisfying one of two residency tests). Operating as a “business” one's net income from this source may be subject to U.S. Self Employment tax. The Self Employment tax is rate is currently set at 15.3%.  The rate consists of two parts, 12.4% for Social Security and 2.9% for Medicare.

What is Self Employment Tax?: 
When one operates as a freelancer, or is self-employed, one is effectively both employer and employee.  So, the responsibility for the Self Employment tax {Calculated on net income on Schedule C} falls on one-self.  Foreign tax credit and/ or the foreign-earned income exclusion cannot be used to offset U.S. Self Employment tax due.  

The only way to exclude the self-employed income of a U.S. citizen or Green Card holder from U.S. Self Employment tax is through the application of a totalization agreement, if available.

What is a Totalization Agreement?:
The United States has entered into totalization agreements with several countries. If such an agreement exists between the U.S. and your country of residence, your business net income may not be subject to US Social Security taxes. 

To avail of this exemption from U.S. Self Employment tax, you may need to be registered as self-employed in your resident country.  You also will likely need to obtain a certificate of coverage from the tax authority in your resident country. This may take some time and effort in the country of residence in, hence you should give yourself time to file by either filing an extension or sending in some preemptive taxes/ estimated taxes. If there is no totalization agreement in place between the US and your resident country, then you will owe U.S. Self Employment tax on your Schedule C net income.

Here is a link to the list of countries that the US has Totalization Agreements with. 

It is funny that the idea for this post came about when an old college friend and I connected through social media after a couple of decades. She needed help with her foreign free lance income & was trying to understand how it would effect her US taxes. Soon we started to talk of other (less mundane things) and how we met for the first time in college in the Principal's office since we both needed a pass for being late after a heart stopping 1986 FIFA World Cup which in India (where we were at that time) was broadcast live in the middle of the night! Diego Maradona's performance in that FIFA World Cup is unforgettable to say the least, the principal joined us in gushing over him & we believe we got off lightly! 

Today also happens to be Diego Maradona's 57th birthday. So Happy Birthday Diego! Thanks to you I made a friend in college whose love of soccer kept me forever entertained in sleepy Commercial Geography lectures! And oh yeah... if you, dear reader want to talk about that some more or have foreign free lance income, do contact us. 

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,

Tuesday, October 10, 2017

Cryptocurrency: The Story and Tax Consequences.

PC: Split, Croatia
Thinking about writing about Bitcoin, I remembered my maverick of an Economics teacher back in high school in Mumbai, India whose very thick south Indian accent meant we did not know what he was saying more than half the time. He started off the chapter on currency by having everyone in class remain standing till we came up with a definition for "Money". Thankfully someone said "medium of exchange" real quick! 

Although the underlying meaning of currency remains the same, the simple concept of a medium of exchange has undergone several upgrades particularly so with the cryptocurrency or digital payment systems known more commonly as Bitcoin. 

Bitcoin started out as recently as 2009, invented by programmer possibly named Satoshi Nakamoto. Transactions with bitcoins can be made without any middlemen, which means-no banks, no transaction fees and anonymity! In addition, bitcoin transactions between countries are easier and less expensive and not subject to regulation (yet). 

This virtual currency can be used to buy goods and services where it is accepted. Some buy bitcoins for investment and hold on to it hoping it will rise in value. 

Tax Treatment of Cryptocurrency By The Internal Revenue Service: 

A. All virtual currency held as investment is treated as property. Hence all the same rules as selling an asset and capital gains apply to any gains or losses from sale of Bitcoins as well. Hence, if you are holding Bitcoins as investment, calculating gains or losses should not be a problem since the basis, holding period and date of sale should be easily determined. 

B. For Bitcoin treated as currency, if one is paid in virtual currency for goods or services provided, its fair market value (as of the day the currency was received) needs to be included in calculating gross income for the year. 

C. For those who "mine" virtual currency, its fair market value on the date of receipt is included in gross income for the year. 

D. If payments of more than $600 were made using virtual currency to an independent contractor for services performed, the payment needs to be notified to the Internal revenue Service via Form 1099-MISC. 

E. Third party settlement organizations are required to aggregate payments made with virtual currency with real currency if (1) the number of transactions settled were more than 200, and (2) the gross amount of payments made exceeded $20,000. 

Penalties via code sections § 6721 & 6722 may be levied on those who fail to comply with the above filing requirements. Penalty abatement may be available for those who can demonstrate reasonable cause. 

Bitcoin has been in the news in 2017 when it's value shot up to $3,000 from $13 in the year 2009. Various virtual currencies like Bitcoin saw it's market cap go to $44 billion, Ethereum's market cap was $21 billion and Bitcoin cash go up to $12 billion in early August of this year. 

More recently, there has been news that a "fork" may take place in the blockchain that stores cryptocurrencies. This spin-off, so to speak, will result in another form of cryptocurrency called "Bitcoin Cash". There may be more tax consequences for those affected by the spin-off. More on that in this article from Forbes by Kelly Phillips Erb.

The Internal Revenue Service started to investigate one of the virtual currency exchanges, Coinbase, asking for an exhaustive list of details about their customers in December, 2016. It figured that a large part of Bitcoin users were not reporting their income/ capital gains on their tax return. Experts see tax exams from the Internal Revenue Service escalating. If you have traded in or purchased cryptocurrency, report and pay your capital gains taxes via amended tax returns. 

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,

Bibliography: Notice-2014-21; Section 6721