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Over the past decade, cryptocurrency has gone from being an obscure form of technological investment to being bought and sold on its own exchanges and even used to pay for goods and services by some large corporations. As it has become a more common asset among your average investors, these folks have had many questions about the tax implications of investing in cryptocurrency, or virtual currency as it is also known. The answers can be somewhat complicated, which is why it always a good idea to consult with an experienced virtual currency tax attorney and CPA like those at the Law Offices of David W. Klasing before filing your returns if you have any cryptocurrency investments. Situations involving cryptocurrency held in foreign accounts or exchanges can be even more tricky, and there is not always a straight answer from the IRS. Though this article runs through the basics of such a situation, it cannot be substituted for the legal expertise of one of our attorneys who has reviewed the specifics of your situation.
Cryptocurrency is a decentralized virtual currency. Unlike traditional currency, it exists independently of any government or financial institution. Additionally, it can be sent between users without passing through a central authority, such as a bank or payment gateway. Transactions are made directly between the sender and receiver, eliminating transfer fees and other charges typically rendered by banks.
An actual “bitcoin” or other forms of virtual currency is just a computer code that has been encrypted so that it can only be read by the sender and the receiver. Once received, it functions like a computer file that can be stored in a digital wallet application on your phone or computer. These transactions are powered by an open-source code called a blockchain. A blockchain is essentially a digital ledger of all transactions involving the bitcoin that is completely public and transparent. Each transaction is a “block” that is “chained” to the code. Individuals known as bitcoin “miners” then use high-speed computers to digitally confirm the transaction, creating a permanent record of all transactions that occur and making fraud extremely difficult.
While Bitcoin was the first and is the most well-known form of cryptocurrency using blockchain technology, many others have followed in its wake. The availability of these forms of digital currency is often limited because, unlike with paper currency, they are not printed in unlimited amounts. These types of cryptocurrency can be acquired in multiple ways, including through online cryptocurrency exchanges, some of which are based in foreign countries.
Under the Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers who meet certain thresholds of money and assets in overseas or offshore bank and financial accounts are required to make a disclosure each year on Form 8938. For unmarried couples, the threshold is $50,000 or more on the last day of the tax year or more than $75,000 at any time during the tax year. For those who are married filing a joint return, the thresholds are $100,000 or more on the last day of the tax year or more than $150,000 at any time during the tax year. If you are married filing separate income tax returns, the thresholds are $50,000 or more on the last day of the tax year or more than $75,000 at any time during the tax year. If you are unsure whether you must disclose on Form 8938, it is always best to reach out before filing to an experienced tax attorney and CPA like those on the team at the Tax Law Offices of David W. Klasing.
FATCA applies to all foreign assets, so the question becomes whether a personal account on a foreign crypto exchange counts or in some other foreign financial or banking institution counts as a foreign asset. Tax experts and lawyers have made arguments both ways, but the IRS has given no clear answer or directions. While they have not officially said that crypto wallets or accounts on foreign exchanges count as foreign assets, they also have never said for certain that they do not count. As such, our attorneys and CPAs are likely to advise you to disclose this information on Form 8938 just to be safe and to prevent any potential headaches down the line. However, each situation is different, and you should not make any decision about whether or not to report without having a skilled tax lawyer like those at the Tax Law Offices of David W. Klasing review the specifics of your case and advise you on exactly what to do in our situation.
Because cryptocurrency is technically an internet currency with no real physical home, the rules regarding whether or not it counts as a foreign asset that must be reported are murky, and the IRS had not made things any less confusing by their silence on the issue. As such, any time you find yourself facing this issue, the best thing you can do is to contact an experienced virtual currency attorney like those on the team at the Law Offices of David W. Klasing, who can thoroughly review your situation and give you the best advice on how to move forward. To set up a consultation, call our office today at (800) 681-1295.
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