FBAR Cryptocurrency & IRS: Is it Required to be Reported?
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Foreign Cryptocurrency & the FBAR
FBAR Cryptocurrency: The FBAR is the Foreign Bank Account Reporting form FinCEN Form 114. The form is required by U.S. Persons who have ownership or interest in a Foreign Account. A common question we receive, is how does FBAR Cryptocurrency reporting work, and of course — Should I report my overseas cryptocurrency to the IRS?
There has been some “guidance” on the issue, but it is ambiguous at best.
And, with the IRS taking part in the J-5 initiative, the recent Coinbase Audit, and 6173 and 6174 letters, it is important to have a strategy in place — if even if just a mental strategy — especially if you are going the non-reporting route.
Should I Report Overseas Crypto to IRS?
When it comes to cryptocurrency, we receive many questions.
Some of the more common questions we receive about FBAR reporting overseas crypto, includes:
- Do I report all cryptocurrency on an FBAR?
- Do I report overseas cryptocurrency on the FBAR?
- How do i report cryptocurrency on the FBAR?
- What if I didn’t report cryptocurrency on the FBAR?
- Will the IRS penalize me?
- Can I go to jail?
Is Cryptocurrency Reported on the FBAR?
Unfortunately, at the current time, neither the IRS nor FinCEN have provided specific written guidance to rely on in order to determine whether your Bitcoin or other Cryptocurrency must be included on the FBAR. Recently, a representative from FinCEN indicated at a conference that FinCEN would not expect the reporting of Cryptocurrency at this time, but they also indicated that the law/reporting is still evolving.
Moreover, the representative did not provide anything in writing (so it cannot be easily relied upon) and did not make any distinction between holding Cryptocurrency in an account versus holding it in a personal wallet.
FBAR vs. FATCA
A distinction needs to be made between FBAR and FATCA.There are different reporting requirements between the FBAR and FATCA. Although FinCEN is responsible for drafting information regarding FBAR — ever since 2003, the IRS is responsible for enforcement.
FBAR is used to report foreign “accounts.” FATCA is used to report specified foreign financial “assets” directly on your tax returns (Form 8938, etc.). Therefore, depending on whether your cryptocurrency is in an account or personal wallet, and depending on whether the IRS views cryptocurrency as either a foreign financial asset or just property, you may be required to file various different forms.
Unlike FBAR, FATCA is a law that was prepared by and enforced via the IRS. And, since the IRS does not view Cryptocurrency as “currency” but rather as “property,” there is concern that it should be reported as a type of Specified Foreign Asset, per FATCA.
The FATCA wording used to describe the reporting is very ambiguous, because it is still unclear as to whether Cryptocurrency should be considered an asset that would be reported (stock) versus a typical non-reportable asset (gold).
Our Two-Cents on the IRS, FBAR & Cryptocurrency
We receive numerous inquiries regarding this issue. And, while we truly enjoy writing articles on all areas involving international tax compliance, we are not the black letter law and cannot be relied on in preparing your own taxes. In addition, we do not represent clients outside of offshore disclosure and we do not provide guidance solely on bitcoins – only as it relates to offshore disclosure.
Based on prior memorandums and relatable IRS information in general, here is most likely what needs to be reported (or not reported):
FBAR
Without boring you too much…a bit of history. The FBAR is a creation of FinCEN. Up until 2003, FinCEN handled the enforcement aspect of FBARs, but that shifted to the IRS in 2003.
Therefore, it is a tough situation because while the line instructions in preparing the FBAR (aka FinCEN 114) is drafted by FinCEN — the enforcement is by the IRS. And at the current time, the IRS is going full force to investigate all issues related to Cryptocurrency. This includes the recent victory by the IRS against Coinbase.
Thus, it is safe to presume the IRS will be enforcing these types of laws against individuals. And, it may be better to err on the side of caution – especially if you have an account overseas and not just a personal wallet.
Personal Wallet
If you are a US person, but reside overseas and have a personal wallet on your home computer in which you maintain Cryptocurrency, chances are it does not need to be reported and we would not recommend reporting it at this time. It is not an account, there is no account number — and therefore simply having a personal wallet on your computer is probably not considered an “account” under FBAR reporting.
Trading Account
If you maintain your Cryptocurrency with a provider such as Coinbase, you have an account number, and the location of the account is outside of the United States, chances are you may have to include it on the FBAR. We are not telling you that you have to include it at this time, because there is no particular law for guidance on that matter currently, but here’s an example:
If you own shares of stock or trading account directly such as a share of Apple – it is not included on the FBAR. Conversely, if you own a trading account that may have stocks and other items within it, then typically you report the account number – not each individual share of stock.
So, is having Cryptocurrency within an account considered an asset that needs to be reported? Our thought would be – if it is an account and it has an account number, then you should consider reporting it (even if not directly required at this time) because obviously the IRS is going full force in enforcing Cryptocurrency rules and the IRS does not like to split hairs.
The IRS is Skeptical of Cryptocurrency
The IRS is skeptical regarding this issue and therefore, it may not hurt you to report the account. With that said, it is a decision for each person to make, individually, in speaking with their own tax preparer, CPA, enrolled agent, or tax attorney.
Regular “Bank” Account
As Cryptocurrency evolves, there are some types of hybrid accounts that maintain both regular money and other shares of stock, as well as Cryptocurrency. Thus, the mere fact that Cryptocurrency is located within the account should not otherwise eliminate the requirement to report the account.
Stated another way, just by putting Cryptocurrency into a regular hybrid type of bank account would not negate you from having to report that bank account, just because it also contains Cryptocurrency.
FATCA
FATCA is the Foreign Account Tax Compliance Act. It is different than the FBAR, because it has always been enforced by the IRS and not some other government faction. When it comes to reporting under FATCA, it requires the reporting of Specified Foreign Financial Assets – if you meet the threshold reporting requirement.
The question of whether Cryptocurrency is considered a Specified Foreign Financial Asset can be argued either way. While the name Cryptocurrency uses the term “currency,” it is not viewed as currency by the IRS. It is an investment, and while people like to make the jump that it is similar to investing in gold, that is really not the case. Cryptocurrency feasibly could go on forever, while there is only a finite amount of gold.
If the Cryptocurrency is an account, you should probably report it. If the Cryptocurrency is not an account, then it is for each person to decide whether to report it. For example, if a person owns real estate (unless owned in a corporation), it is not reported under FATCA. Conversely, if a person owns a share of stock, it is reported in the tax return even if it is not within an account (in other words, individual shares of stock are reportable under FATCA even though it is not reportable in the FBAR).
Since the IRS designates Cryptocurrency as property, it is ambiguous as to whether it is property such as real estate or property such as a specified foreign asset. As we indicated above, since the IRS recently fought for and won a subpoena against Coinbase, the IRS is taking this matter seriously.
In the end, the decision whether to report or not should be up to each individual, along with his or her tax professional.
IRS Offshore Voluntary Disclosure
If you are already out of compliance for cryptocurrency and/or other accounts/assets, one of the safest methods for getting back into compliance is through one of the approved IRS Offshore Voluntary Disclosure Programs (aka IRS Amnesty Program)
Golding & Golding: About Our International Tax Law Firm
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