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Crypto Law/Level VII · Loopholes worth understanding/7.2 Residency and borders/Lesson 6

Tax residence tests and treaties

How countries decide who is a tax resident, why ‘183 days’ is only part of the answer, and how treaties settle a person claimed by two countries.

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. Keep a free day-count calendar backed by travel records: the US substantial presence test needs 31 days this year and 183 weighted days over three years, and the UK treats 183 days in a tax year as residence.
  2. A non-citizen meeting the US test can stay nonresident through the closer connection exception: under 183 days this year, a foreign tax home with a closer connection there, and a timely Form 8840.
  3. Leaving the UK, fewer than 16 days there in a tax year after residence in any of the prior three years, or fewer than 46 days if not, makes you non-resident under the automatic overseas tests.
  4. If two countries both claim you, the treaty tie-breaker looks to permanent home, then centre of vital interests, then habitual abode; a non-citizen claims US treaty non-residence on Form 1040-NR with Form 8833.
  5. US citizens cannot tie-break out of US tax because of the saving clause, and each platform’s recorded residence feeds CARF reporting, so keep it consistent with where you actually file.

MaterialsThe IRS pages on the substantial presence test and the closer connection exception (Form 8840)HMRC’s RDR3 guidance on the statutory residence test and helpsheet HS302 on dual residentsA day-by-day travel calendar for the year

Wonder

  1. Am I a tax resident wherever I spend 183 days?
  2. Can two countries both treat me as a resident?
  3. Does a tax treaty protect a US citizen living abroad?

Explore

  1. Tax residence is a legal status that decides which country can tax a person’s worldwide income, including crypto gains. It is not the same as citizenship, a visa or a passport stamp, and each country sets its own test. Many people believe that spending fewer than 183 days somewhere keeps them out of its tax system. Some tests do use 183 days, but most also look at homes, family, work and patterns over several years. A person can be resident in two countries at once, or briefly in neither.
  2. The United States treats a non-citizen as a resident if they meet the green card test or the substantial presence test. The second test requires at least 31 days in the US in the current year and 183 days over three years, counting all days this year, one-third of last year’s days and one-sixth of the days from the year before. Someone who meets it may still be treated as a nonresident under the closer connection exception: they must have been present fewer than 183 days this year, kept a tax home abroad all year, had a closer connection there, and filed Form 8840 on time.
  3. The UK uses a statutory residence test. A person who spends 183 days or more in the UK in a tax year is resident. Below that, they check the automatic overseas tests, which can make them non-resident, then the automatic UK tests, which include having a UK home for a set period, and finally the sufficient ties test, which counts days against ties such as family, accommodation and work. Split-year treatment can divide the year of arrival or departure. The UAE has its own rules with a 183-day test and a 90-day test with conditions (lesson 7.2.3).
  4. When two countries both treat someone as resident, a tax treaty between them can settle it for treaty purposes. HMRC’s helpsheet HS302 describes the usual tie-breaker tests, applied in order: first, where the person has a permanent home available; if there is a home in both, where their centre of vital interests lies, meaning closer personal and economic links; then where they have a habitual abode, meaning where they live regularly. The OECD model treaty adds nationality and, last, agreement between the two tax authorities. Each treaty has its own wording, so the text of the specific treaty decides.
  5. The United States adds a twist. The IRS says treaties generally do not reduce the US tax of US citizens, because of the saving clause, so a citizen cannot use a tie-breaker to escape US tax (lesson 7.2.1). A non-citizen who is resident under US law but resident of the other country under a treaty tie-breaker can claim treaty benefits by filing Form 1040-NR, computing tax as a nonresident and attaching Form 8833. Treaty residence can also matter elsewhere: the UK temporary non-residence rule counts years of ‘sole UK residence’, which a year of treaty non-residence does not meet.
  6. A practical check: keep a calendar of every day spent in each country, with travel records to support it. Next to it, list where you have a home available, where your spouse or children live, where you work and where your bank accounts, doctor and memberships are. Then read the residence test of each country involved and, if two countries could claim you, the tie-breaker article of the treaty between them. Crypto exchanges also record a residence for reporting purposes (lesson 7.2.7). This lesson explains how the tests work; it does not recommend moving or advise on a particular case.

Key facts

  • A non-citizen is a US tax resident if they meet either the green card test or the substantial presence test.
  • The US substantial presence test requires 31 days in the current year and 183 days over three years, weighted 1, 1/3 and 1/6.
  • The US closer connection exception requires fewer than 183 days of presence in the year, a foreign tax home and a timely Form 8840.
  • Under the UK statutory residence test, 183 days or more in the UK in a tax year makes a person UK resident.
  • Treaty tie-breaker tests usually look first at a permanent home, then the centre of vital interests, then habitual abode.
  • A dual-resident non-citizen claiming treaty residence abroad files Form 1040-NR and attaches Form 8833, according to the IRS.

Exercise nine, six, three, one

9CollectList up to 9 facts that a residence test would look at for a real or imagined person: days in each country, homes, family, work, accounts and memberships.
6ClusterSort them into 6 groups: days, homes, family, work, financial ties and paperwork such as visas and registrations.
3DistillReduce the 6 to 3: which would decide a treaty tie-breaker?
1CrystallizeWrite 1 sentence explaining why counting days alone does not settle where someone is tax resident.

Fact check

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

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