FBAR Reporting Requirements for Cryptocurrency
Does the Report of Foreign Bank and Financial Accounts (FBAR) apply to Cryptocurrency? This is a popular question within the crypto tax community to which no one has a definite answer. This article breaks down the FBAR and how it applies to cryptocurrency.
FBAR, when does it apply?
According to FBAR filing instructions issued by the Financial Crimes Enforcement Network (FinCEN), A United States person that has a financial interest in or a signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value, an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.
In the only official guidance regarding cryptocurrency, IRS Notice 2014-21, the Internal Revenue Service (IRS) determined that virtual currency is considered a property, not currency, for tax purposes. As you can see from the definition of financial account above, property is not on the list. Therefore, some people argue that cryptocurrency does not fall under the FBAR filing requirement. So far, neither the IRS nor FinCEN has issued an official guidance to clarify whether FBAR applies to cryptocurrency. If you research the issue on internet, you will see conflicting conclusions, some people believe that cryptocurrency is not subject to FBAR while some people think otherwise.
What are industry professionals saying?
In June of 2014, an IRS analyst for the Small Business/Self-Employed Division stated in a webcast that, for FBAR purposes, Bitcoin is not reportable “… not at this time.” The IRS analyst also stated that “FinCEN has said that virtual currency is not going to be reportable on the FBAR, at least for this filing season.” However, no guidance was provided for future tax years. The American Institute of Certified Public Accountants (AICPA) issued a letter to the IRS on June 16, 2016 asking the IRS for further guidance on FBAR reporting requirements regarding cryptocurrency. But the IRS has not provided any response yet.
Some tax lawyers argued that since a case law found that foreign online gambling accounts fall under the FBAR filing requirements, foreign cryptocurrency exchanges do as well. On August 9, 2018, FinCEN Director Kenneth Blanco delivered a speech regarding the agency’s approach to cryptocurrency. The speech provided some helpful clarifications and insights, but also left some important questions unanswered. In his speech, Director Blanco reiterated that ICOs are money transmitters, which are subject to the FinCEN’s Anti-money Laundering (AML) regulations. Director Blanco’s speech also suggests that certain peer-to-peer exchanges are money transmitters. However, the speech still leaves considerable ambiguity.
Better safe than sorry
Despite the uncertainty about foreign reporting requirements, many crypto tax professionals suggest erring on the side of caution. Their view is that it never hurts to report, and not reporting is too risky as in a worst-case scenario, failure to report can lead to a $100,000 penalty plus jail time.
In my crypto tax practice, I recommend my clients to file FBAR if they own any crypto exchange account located outside of the U.S. and the account value is more than $10K in USD any time during the tax year. Even though FinCEN did not issue a guidance saying that cryptocurrency needs to be reported under FBAR, the agency also did not issue any statement saying that you will not be implicated for FBAR violations in the future if you don’t report cryptocurrency on your FBAR now. In other words, FinCEN can look back and penalize you in the future, and there is no way for you to go back to change your record of non-reporting now. There is no tax or filing fee associated with FBAR filing, it’s almost a no brainer to file. On the contrary, not filing runs a high risk and puts you in a world of uncertainty.
Sharon Yip - Crypto Tax Advisors, LLC
Sharon Yip is a CPA with 20 years of tax experience in both public accounting and corporate. She is the founder and owner of Crypto Tax Advisors, LLC, a tax practice specializing in cryptocurrency taxation. The firm focuses on serving clients engaged in complicated crypto transactions or involved in cryptocurrency on a full-time basis. Sharon provides comprehensive and personalized business and tax services. Her clients include cryptocurrency traders, miners, and business owners in the crypto space.
Automate your cryptocurrency capital gains reporting by using CryptoTrader.Tax.