It’s been hailed as the wave of the future, dismissed as a failed experiment, and vilified as an enabler of cybercrime and terrorism. No matter how one approaches it, cryptocurrency is a controversial subject – particularly within the context of tax law. As our Bitcoin tax attorneys have chronicled over the years, federal agencies like the IRS and SEC have offered minimal, often contradictory guidelines on the regulation and reporting of Bitcoin for tax purposes, leaving auditors, taxpayers, legislators, and tax professionals to struggle with the resulting confusion. Based on the shifting data available at various points in time, our own cryptocurrency tax attorneys have reached differing conclusions, for instance retracting and refining our initial position on Bitcoin and 1031 exchanges. Fortunately, recent updates from the government agency FinCEN provide greater clarity – at least, with regard to FBAR reporting. Read on to learn what FBAR is, how FBAR relates to Bitcoin, and whether you need to report cryptocurrency on your FBAR.
Before we discuss FBAR as it pertains to cryptocurrency, let’s take a step back and briefly explain what FBAR is. The acronym FBAR stands for “Foreign Bank Account Reporting,” which is precisely as it sounds: a requirement to report foreign bank accounts to the federal government. With some exceptions, FBAR filing requirements typically apply to U.S. citizens, U.S. businesses, and resident aliens whose foreign accounts exceeded $10,000 in combined value at any time during the tax year. Even though the term FBAR makes reference to “Foreign Bank Accounts,” other types of offshore accounts and assets are also subject to reporting, including but not limited to foreign mutual funds, certain indirect interests in foreign financial assets, and certain foreign-issued life insurance or annuity contracts.
As you may have already guessed, this provides a good segue into the issue at hand: is cryptocurrency reportable for FBAR purposes? For instance, would an offshore Bitcoin wallet need to be reported? Or, to phrase the same question another way: does your cryptocurrency wallet constitute a reportable “foreign account”?
Our international FBAR lawyers have addressed this very subject in the past – in this article, for instance, discussing whether Bitcoin or a Bitcoin wallet was reportable for purposes of FBAR or FATCA. However, regulatory uncertainty stemmed from ambiguities around cryptocurrency’s classification. For instance, was it classified as property? A currency? A store of value? A medium of exchange? Or something different? And were cryptocurrency exchanges considered “foreign financial institutions” (FFIs) for FBAR purposes, like traditional foreign banks?
At the time, the IRS had arguably failed to provide the necessary level and depth of information for taxpayers to act confidently or strategically. The U.S. Treasury Inspector General for Tax Administration, or TIGTA, was particularly critical, releasing a September 2016 report which stated, “[T]here has been little evidence of coordination… to identify and address, on a program level, potential taxpayer noncompliance issues for transactions involving virtual currencies.” The report added, “IRS management needs to develop an overall strategy to address taxpayer use of virtual currencies…”
Fortunately, some additional insight was recently provided by FinCEN, or the Financial Crimes Enforcement Network, which is the government agency responsible for processing taxpayer FBAR submissions. (In fact, the FBAR itself is titled FinCEN Form 114, though the acronym is more commonly used.) In response to questions from the AICPA Virtual Currency Task Force, which is part of the American Institute of Certified Public Accountants, FinCEN stated that the relevant regulations, found at 31 CFR § 1010.350(c), list “types of reportable accounts” – which currently exclude cryptocurrency accounts.
Under 31 CFR § 1010.350(c), types of foreign reportable accounts presently include bank accounts, securities accounts, mutual funds, and “accounts that… are an insurance or annuity policy with a cash value.” In plain terms, that means Bitcoin does not need to be reported on your FBAR. However, it is still wise to consult with an experienced tax attorney, as these regulations are subject to change and must be reviewed on a case-by-case basis.
It is vital to be aware that, despite the latest FinCEN guidance, Bitcoin tax regulations are likely to continue fluctuating. In its own words, FinCEN remains “in consultation with the IRS… to evaluate the value of incorporating virtual currency held offshore into the FBAR regulatory reporting requirements.” In other words, FinCEN and the IRS seem to still be considering a different regulatory approach. For the time being – and for peace of mind – taxpayers are advised to seek professional tax guidance. To arrange a reduced-rate consultation concerning Bitcoin tax issues, contact the Tax Law Office of David W. Klasing online, or call our law offices at (800) 681-1295 today.
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