Most people with cryptocurrency transactions are struggling with the tax reporting aspects.
Recent IRS letters only increased the woes of taxpayers with cryptocurrency transactions. If you are one of those taxpayers who has received IRS Letter 6173 or 6174, please check out the article on the subject.
In addition to the IRS Tax disclosures, United States persons are required to disclose their foreign financial account(s) details to the United States Treasury under FinCEN (Financial Crimes Enforcement Network) rules on an FBAR (Foreign Bank Account Reporting) form – FinCEN Form 114.
FinCEN exempts cryptocurrency from FBAR reporting, however, there is a catch
Based on an article in the Journal of Accountancy, FinCEN has confirmed that “regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now.”
Does this mean that accounts held in a foreign crypto exchange are exempt from FinCEN filing requirement?
In our opinion, that’s where the catch is.
The exception from FinCEN response specifically says “virtual currency held in an offshore account.”
That means, if you have ever transferred fiat (USD, EUR, Rupees, etc.) directly to your foreign crypto exchange to buy cryptocurrencies and generally meet the FinCEN Form 114 filing threshold (that is, aggregate value of all foreign accounts has reached $10,000 on any given day during the calendar year), then the FinCEN Filing applies to your foreign crypto exchange accounts equally.
For example, let’s say you have three foreign financial accounts including one account in a foreign crypto exchange. In the first two foreign financial accounts you had $7,000 in total. During the calendar year, you transferred $3,500 to your account in the foreign crypto exchange to purchase Bitcoin. Because your balance, even if only for a day, has hit the $10,000 threshold ($7000 from two accounts plus $3500 into the foreign crypto exchange), you have to disclose all the three accounts using FinCEN Form 114.
AICPA’s Tax Adviser provides hint here: “A taxpayer could have U.S. dollars on a foreign third-party exchange in addition to virtual currency, therefore the U.S. dollar amount should be considered for filing purposes.”
In our opinion, although accounts holding virtual currency in a foreign crypto exchange are exempt from FinCEN disclosures, it does not exempt these accounts if they held any FIAT, even for a day.
FinCEN Exempt, only for now
We will continue to monitor the space for any additional guidance from FinCEN and/or the IRS that is more than likely to be issued by the end of this year.
Journal of Accountancy reported that FinCEN “in consultation with the IRS, continues to evaluate the value of incorporating virtual currency held offshore into the FBAR regulatory reporting requirements.”
IRS has also indicated that it will issue guidance on cryptocurrency taxes this year.
FinCEN exemption does not apply to FATCA disclosures
FinCEN exemption to accounts holding virtual currency in a foreign crypto exchange may not apply to IRS FATCA rules.
Specifically, Form 8938 disclosures which primarily have similar disclosure requirements as FinCEN is not explicitly exempt from the disclosures by the IRS.
IRS is expected to release guidance this year for taxpayers to be able to use for 2019 tax year when filing their tax returns in 2020.
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About the author
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.