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CRYPTOCURRENCY AND FBAR REPORTING

February 28, 2021

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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Recently, the US government foreshadowed the coming of a significant change in its FBAR reporting policy regarding virtual currency.

Currently, a foreign account holding virtual currency does not require FBAR reporting. FinCEN, which is the bureau of the US Department of the Treasury charged with handling FBARS, has announced that it intends to amend its Treasury regulations to make foreign cryptocurrency accounts reportable on the FBAR.

Defining a Foreign Financial Account

If you’re a US expat, you’re most likely familiar with the annual FBAR filing requirement. The FBAR must be filed if the maximum values of your foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year.

The IRS FBAR reference guide (which mirrors the FBAR regulations) lists the types of foreign financial accounts that must reported on the FBAR:

  • Bank accounts such as savings accounts, checking accounts, and time deposits
  • Securities accounts such as brokerage accounts and securities derivatives or other financial instruments accounts
  • Commodity futures or options accounts
  • Insurance policies with a cash value (such as a whole life insurance policy)
  • Mutual funds or similar pooled funds (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions)
  • Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.

Recent IRS Efforts to Handle Cryptocurrency Activities

Prior to this recent announcement on cryptocurrency accounts and the FBAR, the IRS made several moves to incorporate the reality of virtual currency transactions into the tax reporting domain.

First, in Notice 2014-21, the IRS stated generally that virtual currency should treated as any other property and that general tax principles applicable to property transactions should apply to transactions using virtual currency. The Notice also included a FAQ section discussing, in general terms, how gain from virtual currency transactions should be calculated and other more specific issues related cryptocurrency activities.

Since the Notice has come out, the IRS hasn’t offered much additional guidance, other than a more-recently updated FAQ page on its website, with additional information on specific cryptocurrency activities and how they should be reported on the tax return.

Cryptocurrency on the Form 1040 Tax Return

On last year’s Form 1040 income tax return (and again on this year’s income tax return), the IRS added a pointed “yes” or “no” question – “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency?”

In the recently-published instructions to the 2020 Form 1040, the IRS has clarified that a transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control.

A transaction involving virtual currency does include, but is not limited to:

  • The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;
  • An exchange of virtual currency for goods or services;
  • A sale of virtual currency;
  • An exchange of virtual currency for other property, including for another virtual currency; and
  • A disposition of a financial interest in virtual currency.

Cryptocurrency and the FBAR

Given the US government’s increasing interest in cryptocurrency as it relates to taxation, it’s not very surprising that FBAR reporting of cryptocurrency accounts is now in the sights of the IRS.

For now, the law has not been changed – a foreign virtual currency account is not reportable on the FBAR, unless it is a reportable account because it holds reportable assets besides virtual currency.
We will stay on top of this issue and keep you informed when the FBAR regulations are amended – a change that is likely to happen in the near future.

 

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