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Where does an entirely virtual financial institution exist: on your phone, in a server-farm somewhere? Could the location of the founding company turn your Bitcoin wallet into a foreign financial institution? If so, you may need to report cryptocurrency on your FBAR along with your tax returns next year.
This is the second part of a series of blog posts on how U.S. taxpayers need to disclose their cryptocurrency accounts to the IRS. Click here to see part one: IRS Promises Guidance on Reporting Cryptocurrency on Your Tax Returns.
The U.S Bank Secrecy Act requires U.S. taxpayers to file a Report of Foreign Bank and Financial Accounts (FBAR) any time they have at least $10,000 held in one or more foreign financial institutions. An FBAR is a separate form filed with the Treasury Department at the same time as your annual tax return. But who has to file FBARs isn’t always clear. Sure, if you deposit $15,000 in a bank overseas, that will certainly trigger FBAR filing requirements. However, the Bank Secrecy Act applies to anyone with interest in, authority over, or signature rights to a foreign financial account. That generally includes any foreign entity that:
But in a world with cryptocurrency, where are digital assets like Bitcoins held? Do you need to report cryptocurrency on your FBAR? It turns out, these are not easy questions to answer. Virtual currencies often look like financial accounts and non-financial accounts at the same time. They may take the form of stable coins, tokenized assets or securities, a utility, medium of exchange, or store of value. Some of those things need to be reported. Others do not.
There is also a question over where virtual currencies are actually held. Users’ “wallets” are right their on their phone, which in most cases will be located in the U.S. But many of the companies that created and manage the cryptocurrency databases are located overseas. The whole purpose of cryptocurrency programs is to take advantage of decentralized accounting and remove the need for a single third-party to authenticate all the transactions. Without a third-party exchange point, it is difficult to know where bitcoins actually live, or whether you need to report cryptocurrency on your FBAR.
To answer the question, the American Institute of Certified Public Accountants (AICPA) reached out to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) (where FBARs are filed). The Treasury Department responded that as of right now, virtual currency is not considered to be held in an offshore account. That means that currently, you do not need to report cryptocurrency on your FBAR.
But that could change. As the number of people using cryptocurrency continues to increase, and the value of bitcoin and other virtual currencies continues to climb, it seems likely the Treasury Department will want to get in on the action. FinCEN did tell the AICPA that it “in consultation with the IRS, continue[s] to evaluate the value of incorporating virtual currency held offshore into the FBAR regulatory reporting requirements.” With that warning, a conservative taxpayer may want to disclose their virtual assets anyway, or at least keep meticulous records, in case the IRS and the Treasury Department change their minds by year’s end.
Many early adopters of the cryptocurrency movement likely have complicated portfolios and already use an accountant’s help in filing their tax returns. However, if it turns out they must also report cryptocurrency on their FBARs, they will need an accountant and a tax attorney familiar with the rules for reporting foreign financial accounts. Don’t wait to find out the IRS has changed its mind. Speak to a tax attorney now, and be prepared with the records you need, when the time to report does come around.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding reporting cryptocurrencies on your FBARs, contact Joe Viola to schedule a consultation.