Cryptocurrency Tax Amnesty
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Cryptocurrency Tax Amnesty
With cryptocurrency becoming more popular than ever — and both the US tax rules and reporting regulations currently in flux, it is not uncommon for US taxpayers with cryptocurrency to not have reported the cryptocurrency timely or properly to the IRS. It is important to remember that while cryptocurrency may be considered currency by people who utilize it — from a tax perspective, it is considered property and therefore the tax implications of exchanging cryptocurrency or selling cryptocurrency are different than operating with currency such as the US dollar, and investments such as Forex. While the IRS has not created a standalone cryptocurrency voluntary disclosure program, there are various options available for Taxpayers who want to submit to the voluntary disclosure or other amnesty options. Let’s take a look at some of the common issues to consider.
Not a Specific Crypto Amnesty Program
As mentioned above, there is no standalone voluntary disclosure program for cryptocurrency. Still, Taxpayers may submit to the voluntary disclosure program on Form 14457 if they are willful. If they are non-willful, then Taxpayers should consider the streamlined procedures or reasonable cause/delinquency depending on the origin and the type of cryptocurrency that has been unreported.
Domestic or Offshore Crypto
Whether or not a taxpayer has their cryptocurrency in the United States or offshore in a foreign country — the income tax implications are typically the same, although taxpayers who have foreign cryptocurrency may also have foreign tax credits if they have paid taxes abroad. Taxpayers can bring both their domestic and foreign cryptocurrency into tax compliance through voluntary disclosure.
FBAR vs FATCA
Currently, taxpayers are not required to report foreign cryptocurrency accounts on the FBAR unless the account also contains other types of currency such as the EURO or GBP — this is outlined in IRS publication 5569. Conversely, the rules are a little more complicated when it comes to FATCA and Form 8938 — which is used to report assets. Many tax practitioners take the position that while it may not be reportable for FBAR (pending notice 2020-2) it is probably reportable for Form 8938 and FATCA.
Unreported Crypto Income
There are various ways in which a person may have generated cryptocurrency income. One common income-generating example is when a person exchanges their cryptocurrency and receives another cryptocurrency with a fair market value (FMV) that is higher than the basis of the coin. Other examples include when the Taxpayer sells cryptocurrency for profit or earns cryptocurrency by mining, airdrops, or crypto instead of other types of payments for services performed such as employment.
Domestic Disclosure Options
When a person wants to submit to the domestic disclosure program for cryptocurrency, the two main options would be the voluntary disclosure program when the taxpayer is willful or reasonable cause if they are not considered willful. They may also be able to file a Qualified Amended Return — which is not technically a program but an alternative to RC or VDP — if the taxpayer could meet the timing requirements and was not willful or fraudulent in their non-compliance.
Foreign Disclosure Amnesty
When a Taxpayer wants to make a foreign cryptocurrency disclosure, there are various options they may pursue. Willful taxpayers would submit to the voluntary disclosure program. Non-willful taxpayers would submit to either the Streamlined Procedures, Delinquency Procedures, or Reasonable Cause — depending on their specific facts and circumstances.
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