For high-net-worth U.S. citizens considering expatriation, the U.S. exit tax can come as a shock. It’s not just about filing paperwork and handing in a passport—renouncing your citizenship can come with a hefty tax bill on your unrealized gains.

What Is the U.S. Exit Tax?

The exit tax, formally known as the “Expatriation Tax,” is a imposed on certain individuals who renounce their U.S. citizenship or give up their green card after long-term residence.

Here’s how it works:

• Deemed sale of assets: You’re treated as if you sold all of your worldwide assets on the day before you expatriate.

• Exclusion threshold: In 2025, the first ~$890,000 of capital gains is excluded (adjusted annually for inflation).

• Taxed on net gain: Any unrealized gains above the exclusion amount are taxed as if you actually sold your assets.

This means that even though you didn’t cash out, the IRS still wants its share.

Who Is Considered a “Covered Expatriate”?

Not everyone who gives up their citizenship or green card is subject to the exit tax. Only those who meet one or more of the following criteria are considered

• Net worth of $2 million or more on the date of expatriation

• Average annual net income tax liability over the past 5 years exceeds a certain threshold ($201,000 in 2024; indexed annually)

• Non-compliance with IRS filing. If you fail to certify under penalty of perjury that you’ve complied with all federal tax obligations for the last five years

If you meet any of these, you may owe the exit tax—unless you qualify for one of the exceptions.

Exceptions to the Exit Tax Rule

The IRS offers narrow exceptions to being classified as a covered expatriate:

• Dual citizens from birth: If you hold another citizenship from birth and have not lived in the U.S. for more than 10 of the last 15 years, you may avoid the exit tax.

• Minors: Those who renounce before age 18½ and haven’t lived in the U.S. for more than 10 years may also be exempt.

• Green card holders with limited U.S. presence: If you’ve held a green card for less than 8 of the last 15 years, the exit tax may not apply.

ProTax Services helps clients determine if they qualify for an exception and builds documentation that supports their case.

What Assets Are Subject to the Exit Tax?

If you’re considered a covered expatriate, nearly all of your assets are subject to the deemed sale rule. This includes:

• Investment portfolios (stocks, bonds, mutual funds)

• Real estate, even if located outside the U.S.

• Private business interests

• Deferred compensation plans (such as 401(k)s or foreign pensions)

• Non-grantor trusts you’re a beneficiary of

Special rules apply to retirement accounts and deferred income. Some may be taxed immediately, while others face 30% withholding when distributions are made.

How Is the Exit Tax Calculated?

The IRS calculates your tax as if you sold all your assets the day before renunciation. Here’s how:

• Determine fair market value (FMV): Appraise each asset as of your expatriation date.

• Subtract your basis: Calculate your capital gain by subtracting your purchase price (basis) from the FMV.

• Apply the exclusion: For 2025, exclude the first ~$890,000 of capital gains.

• Tax the remainder: The rest is taxed using capital gains rates, typically 15% or 20%, depending on your income level.

This phantom gain can create a real tax liability—especially for those with long-held, appreciated assets.

Pre-Expat Planning Strategies

If you’re considering expatriation, tax planning should start well in advance. Here’s how ProTax Services helps reduce your exit tax burden:

• Gift appreciated assets: Giving away assets before renouncing can reduce your net worth below the $2 million threshold.

• Set up offshore trusts strategically: Trust structures can sometimes shield assets from deemed sale treatment.

• Trigger gains early: Selling appreciated assets now may allow you to realize gains at lower tax rates.

• Evaluate deferral opportunities: In some cases, the IRS lets you defer exit tax with interest, if collateral is provided.

These strategies must be carefully timed and documented to avoid red flags during IRS review.

Filing Requirements and Key Forms

If you renounce your citizenship or long-term residency, you must file IRS Form 8854 to declare your status and calculate potential exit tax. Key steps include:

• Disclose net worth, income, and asset valuations

• Report deemed sale calculations and apply the exclusion

Missing or misreporting information on Form 8854 can result in penalties—and failure to certify compliance may automatically make you a covered expatriate.

Common Mistakes to Avoid When Renouncing

Renunciation is permanent—and the tax consequences can be, too. Here are common errors to avoid:

• Failing to plan early: Waiting until after you’ve built substantial wealth limits your options.

• Assuming you’re exempt: Even dual citizens and green card holders can be caught off guard by exit tax rules.

• Using outdated valuations: Under- or over-reporting asset values can trigger audits and penalties.

• Not consulting a tax advisor: International tax law is complex. Mistakes are expensive.

ProTax Services provides personalized strategies and full compliance support for those ready to exit the U.S. tax system.

The Emotional and Financial Impact of Expatriation

Renouncing U.S. citizenship isn’t just a tax or legal decision—it can be a deeply personal and emotional journey. Alongside the financial implications of the U.S. Exit Tax, individuals often face:

• Emotional ties to identity and heritage

• Complicated family dynamics (especially with mixed-citizenship households)

• Banking and travel limitations after losing U.S. citizen status

• Uncertainty about future tax obligations or reentry to the U.S.

ProTax Services understands that expatriation isn’t just a transaction—it’s a transition. We work closely with clients to balance financial goals with personal values, ensuring you make informed decisions with clarity and confidence.

ProTax Services Helps You Exit Smart—Not Just Exit

Renouncing U.S. citizenship is a life-changing decision. You shouldn’t have to navigate the exit tax alone. At ProTax Services, we guide expats and long-term residents through every step of the process—legally minimizing tax burdens and avoiding IRS scrutiny.

Here’s how we help:

• Personalized analysis of your covered expatriate risk

• Accurate asset valuations and gain calculations

• Strategic pre-exit tax planning to reduce liabilities

• Filing Form 8854 and supporting documentation

• Coordinating with estate and immigration professionals

For years, many crypto investors believed digital assets were anonymous and untraceable. But the IRS has dramatically stepped up its crypto enforcement game—and if you’re trading, mining, staking, or earning crypto in any form, they likely know about it.

So, how does the IRS track crypto? In short: data sharing, blockchain analysis tools, and mandatory reporting.

If you’re involved in crypto—even casually—it’s essential to understand what’s reportable, what red flags to avoid, and how to protect yourself. Here’s what every investor needs to know.

IRS Crypto Enforcement: A New Era of Scrutiny

The IRS has made it clear: crypto is no longer a gray area. Since 2019, the agency has asked taxpayers whether they’ve engaged in any crypto activity directly on Form 1040. And that’s just the beginning.

Here’s how enforcement has expanded:

• John Doe summonses issued to major exchanges like Coinbase, Kraken, and others to obtain customer data.

• AI-driven blockchain forensics, enabling the IRS to analyze public transaction histories on Bitcoin, Ethereum, and other chains.

• Increased audits and penalties targeting non-reporting or incorrect crypto tax filings.

Put simply, the IRS is using every tool available to track down unreported digital asset activity.

New Reporting Rule: Form 1099-DA for Crypto

Beginning in the 2025 tax year, crypto platforms will be required to issue a new type of tax form: Form 1099-DA (Digital Asset).

Here’s what it means for investors:

• Who gets it: Anyone who sells, trades, or receives crypto through a broker or exchange.

• What it includes: Gross proceeds from crypto transactions, cost basis, and gain/loss details.

• Why it matters: The IRS receives a copy—so if you don’t report the same activity, it triggers a mismatch and possible audit.

Previously, the lack of a standardized 1099 for crypto gave many investors the false impression that their activity went unnoticed. That’s no longer the case.

How Crypto Exchanges Share Your Data with the IRS

Most major crypto exchanges—especially those based in the U.S.—are now cooperating fully with the IRS. Even many international platforms are beginning to comply.

Here’s how your data flows:

• KYC (Know Your Customer) procedures tie your identity to your wallet activity.

• API connections transmit trading activity, withdrawals, and deposits to the IRS.

• Annual reports like 1099-K, 1099-B, or 1099-DA detail your transactions and income.

This means you don’t need to receive a form for the IRS to know you had taxable crypto activity. If your name, email, or SSN is associated with an account, you’re on their radar.

What Crypto Activity Must Be Reported?

A common myth is that crypto only needs to be reported if you cash out to fiat. In reality, virtually every type of crypto transaction can create a taxable event.

Here’s what you must report:

• Trades: Swapping one coin for another (e.g., BTC to ETH) triggers capital gains/losses.

• Sales: Selling crypto for cash is a taxable event.

• Airdrops and forks: These are usually treated as income when received.

• Staking and mining rewards: Taxable as ordinary income at the time of receipt.

• Spending crypto: Using it to buy goods or services counts as a sale, and triggers a gain or loss.

• Receiving crypto as payment: If you’re self-employed or a contractor, this must be reported as business income.

If you don’t track and report all of these correctly, you may be vulnerable to penalties—or worse.

Audit Red Flags for Crypto Traders

The IRS is especially focused on discrepancies between what you file and what it sees in its system. Here are the top red flags that could land your return in the audit pile:

• Receiving a 1099-DA but not filing a return (or omitting crypto activity altogether).

• Large gains reported with no supporting cost basis (IRS assumes zero basis = 100% taxable).

• Round-number reporting (suggests estimation rather than proper records).

• Frequent trading with no capital gains reported (especially for high-volume traders).

• Inconsistent income reporting from airdrops, staking, or mining.

Audits involving crypto can be detailed, invasive, and financially painful—especially if you don’t have clean records.

Common Mistakes Crypto Investors Make on Their Taxes

Even well-meaning investors can misreport or overlook critical parts of their crypto activity. These errors often lead to IRS notices, audits, or penalties. Here are some of the most common mistakes we see at ProTax Services:

• Ignoring small trades: Every trade, no matter how small, needs to be reported. Many users mistakenly omit microtransactions thinking they’re irrelevant.

• Forgetting about gas fees: Transaction fees on networks like Ethereum can significantly impact your gains/losses—but many investors don’t factor them in.

• Mixing personal and business crypto: Using the same wallet for both business income and personal investing creates confusion and audit risk.

• Not keeping records: If you don’t document wallet addresses, exchange histories, and transaction timestamps, you could be in trouble if the IRS asks for verification.

• Assuming DeFi and NFTs are “off-grid”: Just because something happens outside of Coinbase or Binance doesn’t mean it’s invisible to the IRS.

ProTax Services helps clients correct these errors before they become expensive problems—and we provide tools to make ongoing compliance simple and automated.

What If You Didn’t Report Crypto in Past Years?

If you’re realizing now that you’ve failed to report past crypto activity, you’re not alone—and there may still be time to fix it.

Here’s what you can do:

• File amended returns for years with missing crypto data.

• Request penalty abatement for first-time errors or reasonable cause.

• Engage a CPA before the IRS contacts you—proactive disclosure is viewed more favorably.

ProTax Services has helped hundreds of clients correct past mistakes and avoid criminal investigations or excessive penalties.

Crypto Taxes Don’t Have to Be Complicated

So—how does the IRS track crypto? Through mandatory reporting, blockchain surveillance, and close exchange cooperation. But knowing how they track is only part of the equation. The real key is staying ahead of the curve, reporting correctly, and using every legal method to reduce your tax bill.

How the IRS Tracks Crypto: What Investors Need to Know

The U.S. Exit Tax: What Expats Should Know Before Renouncing Citizenship