- 1 Bitcoin FATCA Reporting
- 2 Bitcoin as a Foreign Asset
- 3 FATCA (Foreign Account Tax Compliance Act)
- 4 Bitcoin is Not Technically Money
- 5 Specified Foreign Assets – Tax Return Required
- 6 Form 8938 – Two Prong Analysis
- 7 Bitcoin – Why File a FATCA Form 8938?
- 8 FATCA Form 8938 & FBAR Penalties
- 9 Get Into Compliance with IRS Offshore Disclosure
- 10 When Do I Need to Use Voluntary Disclosure?
Bitcoin FATCA Reporting – Certified Tax Lawyer, We Specialize in FATCA
Even though Bitcoin is often used for legal purposes, it is still a currency of choice for the dark-web (purchasing illegals anonymously), which is why the IRS still frowns upon its use and refuses to classify it (at this time) as currency.
Bitcoin FATCA Reporting
Bitcoin is no longer a “secret currency.” It has become a mainstream form of currency used for many different purposes. While oftentimes Bitcoin is used to provide anonymity for individuals engaging in various different types of deals, the majority of these deals are legal and above-the-table transactions.
Bitcoin as a Foreign Asset
While Bitcoin is considered crypto-currency by its users, the IRS classifies this as property. This is important, because when Bitcoin is being used to “purchase” items, the IRS sees it as a transfer or exchange of one property for another – which leads to Capital Gains issues.
FATCA (Foreign Account Tax Compliance Act)
FATCA is the Foreign Account Tax Compliance Act. It is Government Act designed to reduce offshore tax evasion, fraud and other means by requiring individuals who have foreign money to report their money on various different forms. Not all Bitcoin would be subject to FATCA reporting, but if the crypto-currency is being held, maintained or stored in an offshore wallet, then it is probably going to need to be reported.
Prior to the initiation of FATCA, for the most part, the main reporting form individuals with foreign accounts was the FBAR. Since 2010 and 2014, FATCA is the new kid on the block. The United States has entered into FATCA agreements with more than 100 countries, and there are more than 300,000 foreign financial institutions which have agreed to actively report account holders to the United States.
*May people get caught up in the term “Offshore.” Offshore does not mean stashing Bitcoin in the Caymans, Bahamas, or British Virgin Islands. It usually just means “abroad’ our outside the United States.
Bitcoin is Not Technically Money
The IRS has a tendency to classify everything in its favor (Read: Schoolyard Bully). Therefore, when it comes to Bitcoin, chances are that since it is considered an Asset, the United States will require Bitcoin held abroad to be reported on both an FBAR and FATCA Form 8938.
Today’s focus will be on the latter, and specifically IRS Form 8938.
Specified Foreign Assets – Tax Return Required
Form 8938 is different than the FBAR , as well as many different forms. That is because unlike the FBAR or 5471, 8621, etc., the form only needs to be filed if you are required to file a tax return. For example, if you have foreign accounts that exceed $10,000 on any given day in any given year, you have to file the annual FBAR Statement. It does not matter whether you actually have to file a tax return; rather, if you meet the threshold requirement to file and FBAR, then you have to file their respective of whether you file a tax return for that year.
Form 8938 – Two Prong Analysis
Prong 1 – Tax Return
As we stated above, a person must have to file a tax return in the current year in order to be required to file the Form 8938. If a person needs the elements of having to file a form 8938 but is not required to file a tax return, and they are not required to file the form.
Prong 2- Threshold Requirement
Unlike the FBAR, that has a straight “annual aggregate total exceeding $10,000 on any given day” threshold requirement, FATCA Form 8938 is different. There are basically four threshold requirements, depending on whether a person resides in the United States or as a foreign resident, and whether the person files married filing jointly or single/married filing separately.
As you may imagine, the highest threshold is for people who reside outside of the United States and are filing married filing jointly, and the lowest threshold is for single individuals residing within the United States.
Bitcoin – Why File a FATCA Form 8938?
Step 1: It is Property
The IRS classifies Bitcoin as property. Therefore, the property is exchanged for other property at a different value between them, the IRS classifies this as capital gain. Therefore, even though it is used as currency, and for all intents and purposes it is currency – from the IRS perspective it is property.
**Important to keep in mind, is that even if the IRS was to relent or acquiesce and agree that it is currency, then the wallet that you are holding it in is most likely going to be considered an account and therefore the Have to be reported on a form 8938 as well (unless it meets certain exclusions)
Step 2: Property is an Asset
Whether this personal property such as a gold Rolex (personal property), or real property such as an investment rental (real property) — these are all different types of properties. Properties are your assets, and depending on the different type and location of the asset, it will determine whether the asset must be reported on form 8938.
**Remember, form 8938 is entitled “Statement of Specified Foreign Financial Assets”
Step 3: Is Bitcoin Being Held Abroad
Technically, Bitcoin in and of itself is not a foreign asset. If you purchase Bitcoin domestically and your Bitcoin wallet is located in the United States, then nothing about the ownership is reportable on form 8938. In reality, while maintaining your Bitcoin wallet in the U.S. may avoid reporting, you presumably would want to keep your Bitcoin as anonymous as possible, usually overseas and unmarked while it that does not have your name or any other identifying information.
Therefore, to error on the side of caution, you can presume that whether Bitcoin is considered to be an asset or currency, if it is being held in a foreign account (unless very narrow exclusions apply) you would be required to report the Bitcoin on form 8938
Side Note: Anonymous May Equal Willful
This is a very important concept. If you knowingly place your Bitcoin into a foreign wallet and do not report it (if you were aware that you had a reporting requirement) , the IRS is going to presume you are willful. The reason is twofold:
First, you knowingly placed your Bitcoin overseas into an account which does not have your name on it, and from the IRS is perspective (not ours) why would you place your money offshore in an unnamed account unless you did not want it to be discovered?
Second, you knowingly did not report the wallet. Now, you may come to your own conclusion that you believe, wholeheartedly, that by placing Bitcoin into an anonymous account it was not under your name and technically does not need to be reported. Unfortunately, you would be hard-pressed to find a single individual at the IRS to agree with you.
Rather, they will come to the conclusion that because you can access and use the money freely, all you are doing is knowingly trying to place it outside the reach of the US government, while still having full access to it. Likewise, even if the IRS could not show intent, they would get you for reckless disregard (which has the same penalty structure as full-blown intent/willfulness).
FATCA Form 8938 & FBAR Penalties
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Get Into Compliance with IRS Offshore Disclosure
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
We Can Help.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)