Henry+Horne Blog

Clarification on cryptocurrency and foreign reporting requirements

Ever since cryptocurrency began entering the mainstream vocabulary in the last few years, tax professionals have struggled with various reporting requirements related to virtual currency. The IRS eventually provided guidance regarding the reporting of sales and exchanges of cryptocurrency, as well as what transactions are subject to ordinary income treatment versus capital gain.

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An issue that had not received guidance until very recently was the potential requirement for reporting cryptocurrency on FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, or FBAR for short. FBAR filing is required when the balance of all foreign accounts exceeds $10,000 USD at any point during a tax year. There were many questions as this relates to cryptocurrency. Is crypto considered a foreign currency? Are the exchanges that coins are bought and sold on considered foreign bank accounts? Is a cold wallet, used to safely store cryptocurrency off of the exchanges, a potentially reportable account? There were (and are) a whole lot of questions, and few answers.

The AICPA Virtual Currency Task Force recently contacted FinCEN to hopefully receive some guidance on these issues, and FinCEN did issue several helpful statements. Most notably, FinCEN stated that their regulations defining reportable offshore accounts do not currently include cryptocurrency. So at least for the time being, holding crypto does not trigger an FBAR filing requirement. However, it is important to note that the holding of regular US dollars on a foreign cryptocurrency exchange does constitute a reportable account if the $10,000 threshold is reached. Only virtual currency is currently exempted from the reporting requirement, not traditional currency.

Open questions do still remain. While the FBAR is administered by FinCEN, there is a separate form administered by the IRS for which no guidance has been issued. Form 8938 (Statement of Specified Foreign Financial Assets) requires similar reporting to the FBAR, but the IRS’ viewpoint on the reporting of virtual currencies on Form 8938 has currently not been addressed. Because guidance has not yet been issued, taxpayers owning virtual currencies may wish to take the conservative approach and file Form 8938, or at least discuss the possibility with their tax advisor.

Cryptocurrency is still in its infancy, particularly regarding regulatory matters, so we can expect lots of news and likely many changes over the next several years. Stay tuned for more updates as they occur. If you haven’t gotten your fill of cryptocurrency talk here, please check out my in-depth article addressing some of the more technical points of crypto, as well as its tax treatment.

 

Austin M. Bradley, CPA

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