- 1 Virtual Currency Foreign Assets
- 2 FinCEN 114 for Virtual Currency
- 3 Hybrid Foreign Accounts and FBAR
- 4 FATCA (Form 8938)
- 5 PFIC (Form 8621)
- 6 Notice 2020-2
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Golding & Golding: About Our International Tax Law Firm
Virtual Currency Foreign Assets
*This 2021 article has been updated in 2023.
Over the past several years, a common question for U.S. taxpayers across the globe is whether or not a foreign-based virtual currency such as Bitcoin that is held overseas is reportable for FBAR (Foreign Bank and Financial Account Reporting) or FATCA (Foreign Account Tax Compliance Act) purposes. To date, the IRS has not yet provided a hard and fast rule as to foreign crypto reporting, but there is an updated FBAR publication and proposed regulations pending. Let’s take a brief look at how foreign virtual currency/virtual currency should be reported for FBAR and FATCA purposes.
FinCEN 114 for Virtual Currency
When virtual currency is being held in a foreign financial account or something similar and there is no other currency (such as euros) held within the account, then the account is generally not reportable. It is important to note, that if there is any currency held within the account outside of virtual currency, then the account may become reportable.
As provided by the IRS in pub 5569:
A foreign account holding virtual currency is not reportable on the FBAR (unless it’s a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). These funds aren’t reportable at this time, per FBAR regulations issued by FinCEN February 24, 2011, but FinCEN Notice 2020-2 indicates FinCEN’s intention to propose amending the regulations to include virtual currency as a type of reportable account under 31 CFR 1010.350.”
Hybrid Foreign Accounts and FBAR
When an account is only virtual currency, then it does not have to be reported for FBAR at this time — but the same rule does not apply if it is a hybrid account in which it holds reportable assets in addition to virtual currency. For example, if a taxpayer exchanges their foreign virtual currency for pounds or euros within that account, then it may be considered a hybrid account that requires reporting.
FATCA (Form 8938)
FATCA is different than FBAR and can include additional foreign assets that are not reportable for FBAR. For example, a foreign asset that would be reported for FATCA purposes on Form 8938 is an overseas stock certificate — but this same stock certificate would not usually be subject to FBAR reporting unless it was held within an account. The question then becomes whether foreign virtual currency/virtual currency is considered an asset that is reportable on Form 8938. Since virtual currency is considered an asset — and there is no absolute exclusion from having to report virtual currency for FATCA purposes — chances are virtual currency would be a reportable asset on Form 8938.
PFIC (Form 8621)
PFIC refers to Passive Foreign Investment Companies. Many US taxpayers may find themselves subject to the PFIC rules simply because they own foreign mutual funds or other pooled funds. In the past few years, multiple crypto investment funds have been launched both in the US and abroad. And, if a crypto fund qualifies as a PFIC, then Form 8621 would be required (unless an exception, exclusion or limitation applies).
Notice 2020-2 reflects the fact that FinCEN intends to amend regulations requiring virtual currency to be identified as a reportable account for FBAR purposes – and chances the IRS will extend the reporting rule to FATCA/Form 8938 as well.
Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.