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Crypto Law/Level VII · Loopholes worth understanding/7.2 Residency and borders/Lesson 1

Citizenship-based taxation: the US exception

Why a US citizen’s crypto gains stay taxable in the United States wherever the citizen lives, and why the usual relief tools rarely reach those gains.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Living abroad, the US 0% long-term band still applies: a citizen with 2026 taxable income within $49,450 single or $98,900 joint can realize long-term crypto gains at 0% federal tax, but must still report worldwide income under 26 CFR 1.1-1(b).
  2. Where the residence country taxes the same gain, claim the foreign tax credit, usually on Form 1116, to avoid paying twice; living in a zero-tax country leaves nothing to credit, so the full US tax remains.
  3. The foreign earned income exclusion, $132,900 for 2026, removes wages only, never crypto gains, and §911(f) stacks excluded wages back when setting rates; it requires bona fide foreign residence or 330 full days abroad in 12 months.
  4. File from abroad using the automatic extension to 15 June (interest runs from April), answer the Form 1040 digital-asset question, and file FBAR or Form 8938 where thresholds apply; treaties’ saving clause generally does not cut a citizen’s US tax.
  5. Renouncing is the only exit from citizenship-based taxation, and covered expatriates face the §877A deemed sale; certify five years of compliance on Form 8854 or anyone becomes covered.

Materials26 CFR 1.1-1, the regulation saying citizens are taxed wherever resident (on law.cornell.edu)The IRS pages ‘U.S. citizens and resident aliens abroad’ and ‘Foreign earned income exclusion’Rev. Proc. 2025-32, section 4.39, for the 2026 exclusion amountLesson 2.3.6 on FBAR and FATCA reporting

Wonder

  1. If I live abroad and never set foot in the US, do I still owe US tax on a crypto sale?
  2. Doesn’t the foreign earned income exclusion cover people who live overseas?
  3. What happens if the country I live in charges no tax at all?

Explore

  1. Most countries tax people because they live there. The United States also taxes people because they are its citizens. A Treasury regulation, 26 CFR 1.1-1(b), says that ‘all citizens of the United States, wherever resident’, and all resident aliens are liable to US income tax. The same regulation says that every person born or naturalized in the United States and subject to its jurisdiction is a citizen. Very few other countries tax their non-resident citizens in a general way, which is why this lesson calls it the US exception.
  2. The Supreme Court upheld the rule in Cook v. Tait, 265 U.S. 47, decided on 5 May 1924. Cook was a US citizen permanently living in Mexico City whose income came from property in Mexico. The Court held that the power to tax depended on his relationship to the United States as a citizen, not on where he lived or where his property was. In practice this means that a US citizen who lives abroad must still report worldwide income, including crypto gains. The IRS gives filers living abroad an automatic two-month extension, to 15 June for calendar-year filers.
  3. For crypto this has a direct result. A US citizen living in Lisbon or Dubai who sells or swaps a coin applies the same US property rules as someone living in Ohio (lesson 2.1.1), answers the digital asset question on Form 1040 (lesson 2.3.4), and pays US tax on any gain. Short-term and long-term rates work the same way (lesson 2.3.2). A move abroad does not reset the cost basis or change the holding period. Accounts on foreign platforms can also bring FBAR and Form 8938 duties (lesson 2.3.6).
  4. The foreign earned income exclusion in section 911 is often misunderstood. For 2026 it lets a qualifying person exclude up to $132,900 of foreign earned income, according to Rev. Proc. 2025-32. To qualify, the person must be a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year, or be physically present abroad for at least 330 full days in any 12 consecutive months. But ‘earned’ means pay for personal services, such as wages, salaries and professional fees. A capital gain from selling a coin is not earned income, so the exclusion does not reach it.
  5. The other relief tool is the foreign tax credit. If someone paid income tax to another country on income that the US also taxes, the IRS says they may claim a credit, usually on Form 1116, which reduces the US tax. Tax treaties help less than people expect: the IRS says treaties generally reduce the US tax of foreign residents, but with certain exceptions they do not reduce the US tax of US citizens. This is called the saving clause. The catch is that where the country of residence charges no tax on a gain, there is no foreign tax to credit, and the full US tax remains.
  6. A practical check: write down every citizenship you hold, including any acquired by birth in the United States or through a US parent, and whether you hold a green card. Then list the crypto you sold, swapped or spent this year and where you lived when you did it. For each sale, note whether your country of residence taxed it, which shows whether there is any foreign tax available as a credit. Giving up citizenship has its own tax consequences (lesson 7.2.4). This lesson explains the rules; it does not recommend moving or renouncing. A tax professional familiar with both countries can apply them to a specific case.

Key facts

  • Under 26 CFR 1.1-1(b), all US citizens, wherever resident, are liable to US income tax.
  • In Cook v. Tait (1924), the Supreme Court upheld US income tax on a citizen living in Mexico, basing the power to tax on citizenship.
  • For 2026, the foreign earned income exclusion under section 911 is $132,900, according to Rev. Proc. 2025-32.
  • The foreign earned income exclusion covers pay for personal services, not capital gains from selling crypto.
  • The physical presence test for the exclusion requires at least 330 full days in a foreign country in any 12 consecutive months.
  • The IRS says tax treaties generally do not reduce the US tax of US citizens, under what is called the saving clause.

Exercise nine, six, three, one

9CollectList up to 9 facts about your own ties to the United States or to another country: citizenships, green cards, places you lived, accounts you hold and crypto sales you made while abroad.
6ClusterSort them into 6 groups, such as citizenship, residence, earned income, gains, foreign taxes paid and reporting forms.
3DistillReduce the 6 to 3: which ties actually decide where your crypto gains are taxed?
1CrystallizeWrite 1 sentence explaining why a move abroad does not by itself end US tax on a citizen’s crypto gains.

Fact check

Dates, figures and claims checked against the published sources listed below.

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