Cryptocurrency and FBAR: What are the rules? Must you declare token holdings on FBAR filings? Let’s explore the issue.
IRS Declares Cryptocurrency A Property
In 2014, the IRS issued Notice 2014-14, which categorized cryptocurrency as property. Then, at the end of 2017, the IRS subpoenaed account information from Coinbase, a popular token wallet and exchange. The move raised questions in the cryptocurrency legal community; namely: Are cryptocurrencies on foreign exchanges subject to foreign tax reporting requirements (such as FATCA and FBAR)?
What is an FBAR?
An FBAR, or Fincen Form 114, is a tax disclosure filed by US persons with ownership or signatory authority over foreign financial accounts that cumulatively exceed $10,000 at any time during a tax year. For example, if you had two foreign accounts that each had $5,002, an FBAR is required. Note that you don’t have to pay taxes on foreign accounts, but you must disclose the account number, location, and maximum value of each account for the tax year via an FBAR filing.
What types of accounts must you report on FBARs? Checking, savings, money market funds, CDs, life insurance plans, and even online poker and bank accounts all count. The FBAR deadline is the same as the tax deadline, April 15th of each year. You can negotiation an extension.
Tokens May Be Property, But It’s Not That Simple
The IRS’ “property” classification blurred the tax reporting line for crypto holdings. FBARs require that you report foreign accounts, not foreign property. However, if you hold property in a foreign account, it’s reportable. Just like holding stocks in a brokerage account or gold in a safety deposit box.
Cryptocurrency and FBAR: The Status of Offshore Tokens
Investors typically keep digital tokens in wallets or exchanges. Some — like Bitfinex, Binance, and BTC-E — operate outside of the United States, which raises the question: Are exchanges and wallets considered “accounts” using FBAR standards?
As of the writing of this article, the IRS hasn’t issued guidance on whether or not cryptocurrencies held in foreign exchanges or wallets are considered foreign accounts that must be reported on FBAR and FATCA forms.
Although the IRS hasn’t explicitly said it’s required, foreign cryptocurrency exchanges and wallets are similar to online poker accounts, which you must disclose.
In May 2018, Bitfinex, a foreign cryptocurrency exchange based in the British Virgin Islands, announced that it “may” exchange information about its users with foreign tax authorities. Further, Bitfinex sent a letter to certain users requiring that they self-certify their tax residence and provide identifying information. Most practitioners agree that the exchanges are making these moves for one reason: they’re likely complying with FATCA and handing over user data to the United States government.
Since Bitfinex, a foreign exchange, is complying with FATCA, we believe that other foreign cryptocurrency exchanges will follow. Further, since the exchange is self-identifying as a foreign financial account, it’s likely that the IRS will treat them as such.
To err on the side of caution, if you have $10,000 or more worth of cryptocurrency in foreign exchanges or wallets, file an FBAR. You won’t incur a tax burden for filing the FBAR, but there can be penalties for not filing!
Don’t Forget FATCA, Form 8938
In addition to the FBAR, authorities may require that you report foreign cryptocurrency exchange or wallets on Form 8938, also known as FATCA. Form 8938 is the part of a tax return that identifies foreign accounts.
Connect With A Cryptocurrency Tax Lawyer Today
If you’re unsure whether or not your cryptocurrency holdings are subject to tax reporting requirements or other government filings, give us a call. Our firm has both tax and tech divisions, making us an ideal choice for cryptocurrency investors and businesses.
Head here to learn more about Andrew Gordon, the firm’s primary cryptocurrency tax lawyer. In addition to a quick bio, the page includes helpful videos about the intersection of tax law and tokens.
Are you ready to speak with a cryptocurrency tax lawyer? Get in touch today. We have the answers to your questions and craft bespoke compliant tax positions that keep clients as profitable as possible.