April 12, 2022

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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Foreign Crypto Reporting on the Horizon

On March 28, the Treasury Department released its Green Book, explaining revenue estimates included in the fiscal 2023 federal budget. One of the Green Book’s highlights was the introduction of proposed enhanced reporting rules for so-called foreign digital assets and accounts.

In this blog, we explain the government’s proposal, including areas that we think will need further explanation in order for the new rules to have a practical effect on reporting.

Foreign Financial Asset Reporting – Generally

Currently, Section 6038D of the Internal Revenue Code (Code) requires any individual that holds an interest in one or more specified foreign financial assets with an aggregate value exceeding certain thresholds to attach a FATCA Form 8938 to his or her income tax return.

Failure to provide the required information for a taxable year is subject to a penalty of between $10,000 and $60,000 for each such failure, in addition to increasing the rate of the so-called accuracy-related penalty in the case of an underpayment of tax attributable to a transaction involving an undisclosed foreign financial asset.

Proposed Foreign Crypto Reporting

As explained in the Green Book, Code Sec. 6038D(b) would be amended to require that interests in certain foreign financial accounts that hold cryptocurrencies and other digital assets be disclosed to the IRS. This would apply to U.S. taxpayers who have over $50,000 in cryptocurrency, financial accounts, and other assets abroad.

According to the proposal, “a foreign digital asset account would be defined based on where the exchange or service provider is organized or established.” The IRS would promulgate regulations to coordinate the amendment with other requirements associated with Form 8938 to mitigate duplication and minimize burden with respect to such other requirements.

In explaining the reason for the amendment, the Green Book states: “Compliance and enforcement with respect to digital assets is a rapidly growing problem. Since the industry is entirely digital, taxpayers can transact with offshore digital asset exchanges and wallet providers without leaving the United States. The global nature of the digital asset market offers opportunities for U.S. taxpayers to conceal assets and taxable income by using offshore digital asset exchanges and wallet providers.”

It remains to be seen how the Code and regulations will define exactly what is meant by a “foreign digital asset account,” particularly given the fact that the crypto industry is technologically complex and mostly confined to a digital world, so establishing an exchange or service provider’s location of organization may prove difficult.

Effective Date for Foreign Crypto Reporting

The proposal would take effect for tax returns that are required to be filed starting with the 2023 tax year.

US expats with foreign crypto assets and accounts should monitor this proposal to see whether it eventually becomes law. Hopefully, if and when passed, the statute and accompanying regulations will further define the scope and parameters of the reporting obligation.

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