Should Cryptocurrency Investors File FBAR?
Over the past five-to-ten years, a common question for U.S. taxpayers across the globe is whether or not a foreign-based cryptocurrency — such as Bitcoin and Ethereum that is held overseas — is reportable for FBAR (Foreign Bank and Financial Account Reporting) or FATCA (Foreign Account Tax Compliance Act). To date, the IRS has not yet provided a hard and fast rule as to reporting, but there is an updated FBAR publication and proposed regulations pending. Let’s take a brief look at how foreign virtual currency/cryptocurrency should be reported for FBAR and FATCA purposes.
Cryptocurrency and FBAR
When cryptocurrency is being held in a foreign financial account or something similar and there is no other currency such as Euros or other Fiat 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 cryptocurrency — it may become reportable.
As provided by the IRS in pub 5569:
Example: 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.
FBAR Hybrid Account
When an account is only cryptocurrency, then it does not (currently) have to be reported for FBAR — but the same rule does not apply if it is a hybrid account in which it holds reportable assets in addition to virtual currency. This is why taxpayers have to be careful, for example, if they are exchanging their foreign cryptocurrency for dollars or euros within that account, then it may be considered a hybrid account that requires reporting.
FATCA (Form 8938)
FATCA (Foreign Account Tax Compliance Act) is different than FBAR. With FATCA, a person is required to disclose their foreign accounts and assets. For example, a foreign asset would be an overseas stock certificate, whereas an overseas stock certificate would not be reported on the FBAR — unless it was held within an account. The question then becomes whether foreign virtual currency/cryptocurrency 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.
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 this rule to FATCA/For 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.
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