According to JDSUPRA, The American Bar Association has written to the US Internal Revenue Service, asking it clarify whether assets held as cryptocurrencies such as Bitcoin are subject to the Foreign Bank Account Reports (FBAR) and Form 8938 reporting rules.
IRS Notice 2014-21asserted that cryptocurrencies were 'property' rather than currencies for federal income tax purposes but did not address their FBAR and Forms 8938 status.
US Cryptocurrency Investors Made $92 Billion of Taxable Gains during 2017 Alone, Resulting in about $25 Billion of Cryptocurrency related Tax Liabilities, and the ABA Is Asking the IRS to Offer an Offshore Voluntary Compliance Initiative Focused on Virtual Currency and Equivalent Assets.
“It is unclear whether a taxpayer holding cryptocurrencies on a foreign cryptocurrency exchange (e.g., Xapo.com or Binance.com) or in a wallet maintained by a foreign wallet service provider (e.g., Blockchain.com) is required to report the account(s) on an FBAR as it is unclear whether cryptocurrencies may qualify as a reportable account for FBAR purposes.
There is tension between the Service’s classification of cryptocurrency as “property,” the Securities Exchange Commission’s (“SEC”) classification of cryptocurrency, in certain circumstances, as a “security,” and the Commodity Futures Trading Commission’s (“CFTC”) classification of cryptocurrency as a “commodity.”
This tension is perhaps most pronounced in the context of the FBAR reporting requirements, which blend concepts of tax, securities, commodities, and money and finance laws.
- On the one hand, if cryptocurrency is property, then it is arguably not subject to FBAR reporting requirements because it is not, under the current regulatory definitions, a “bank, securities, or other financial account.”
- On the other hand, if cryptocurrency is a “security,” then FBAR reporting requirements may apply under the general rule: “each United States person having a financial interest in, or signature authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner…”
- Moreover, by treating cryptocurrency as “property,” the answer to whether cryptocurrency held in foreign wallets must be reported likely depends on what functions the wallet provider actually provides, which may be difficult for taxpayers to determine in many cases.
- Furthermore, it is unclear how these requirements may apply to taxpayers who hold cryptocurrencies directly on a distributed blockchain.
Additional guidance is needed with respect to whether, and the extent to which, the FBAR reporting requirements apply to cryptocurrency. Assuming an FBAR may be required in particular cases, it would also be helpful if guidance addresses the differences in filing requirements for cryptocurrency held on an exchange, cryptocurrency held through a wallet service company (custodial or noncustodial), or cryptocurrency held directly through a wallet address maintained by the taxpayer.
The ABA believes that cryptocurrency that is held directly by a taxpayer or held through a noncustodial wallet should not be reportable on the FBAR as there is no “financial account” maintained by a third party as there is with other reportable accounts.
We previously discussed, that an abundance of caution
, a taxpayer may want to report their investments in cryptocurrencies on their FBAR and Form the 8938
, since Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.
In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions.
Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.
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