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Cryptocurrency Enforcement a Tax Priority – IRS Pursues Crypto Taxes

Cryptocurrency Enforcement a Tax Priority - IRS Pursues Crypto Taxes (Golding & Golding)

Cryptocurrency Enforcement a Tax Priority – IRS Pursues Crypto Taxes (Golding & Golding)

Cryptocurrency Enforcement a Tax Priority – IRS Pursues Crypto Taxes

In case you though the IRS “forgot” about your unreported taxes and disclosure for cryptocurrency — they haven’t.

In fact, at a recent tax forum in New York City, the IRS stated that Cryptocurrency is a key enforcement priority, and that CI has already initiated criminal investigations involving cryptocurrency.

This would align with the IRS’ recent joining of the J5 initiative (designed to combat offshore evasion and cryptocurrency), along with the issuance of a Subpoena to Coinbase — in addition to many any other initiatives designed to combat cryptocurrency tax violations.

Cryptocurrency Tax Basics

Cryptocurrency and U.S. tax law is complex. The IRS is supposed to issue regulations in the near future involving the treatment of cryptocurrency, but here are some of the basics of Cryptocurrency and U.S. Tax Laws to tide you over:

Cryptocurrency Income Tax

If a person exchanges services and receives cryptocurrency in exchange for their services, the recipient has received income, and that income must be reported on a tax return, and taxed.

For example, David works as a consultant for a company and receives a 1099-Misc and $20,000 worth of Bitcoin Cash. David will book $20,000 dollars as income.

Cryptocurrency Capital Gain Tax

When a person sells Bitcoin or other crypto, it is the equivalent selling property. For example, if David purchased a house for $100,000 and sold a house five years later $150,000 (non-primary residence), then David would have a capital gain on the difference between the basis and the sale price – the same holds true for cryptocurrency.

For example, David purchased $50,000 dollars of cryptocurrency, and then sold it two years later for $75,000, David would have capital gain tax on the sale, which he would presumably report on schedule D with an accompanying form 8949 to detail each transaction.

Exchanging Cryptocurrency such as Bitcoin

This is a bit more complicated but mimics the concept of the sale of Bitcoin. For example, David purchased Bitcoin for $10,000 which is now worth $15,000.

David exchanges his Bitcoin with Michelle’s other cryptocurrency, because David believes it is gaining traction in the market. Michelle purchased her cryptocurrency for $8,000 and it is now worth 20,000.

From David’s point of view, he received $20,000, and his basis in his Bitcoin that he traded with $10,000.  That means David would have a gain of $10,000.

Alternatively, Michelle had cryptocurrency that she purchased for $8000, and received bitcoin worth $15,000 dollars in exchange.  Therefore, Michelle would have a gain of $7000.

Thereafter going forward, David’s basis and his cryptocurrency would be $20,000, and Michelle’s basis in her cryptocurrency would be $15,000.

Cryptocurrency Reporting

Here are some of the basics of Cryptocurrency Reporting:

Do I File an FBAR for Cryptocurrency?

Here is a breakdown of when you may need to report cryptocurrency.

Personal Wallet

No government agency has said for sure, 100% that you have to file an FBAR for Cryptocurrency.  If you happen to keep or maintain your cryptocurrency in your own personal wallet then there is a fair argument to be made that you will not have to report the personal wallet unless the IRS specifically says so.

Why? Because a personal wallet is equivalent to having other property/assets in your own “pocket” and unless your pocket is a foreign financial institution, there really is no way to report it.

Therefore, if it is in a personal wallet and unless the IRS says you have to report personal wallets, you can consider taking the position that you do not have to report it.

Foreign Bank Account for Cryptocurrency

If you have your cryptocurrency in a foreign bank account, for example such as how Binance recently opened its own accounts for cryptocurrency, then the rules are presumably different – and you will probably have to report.

Here’s why:  When you have a personal wallet, the idea is that you do not have to report cash you have sitting in your overseas house — only if it is in a financial institution or you meet one of the exceptions such as having your money in a lockbox, in a foreign financial institution that the institution can access. 

Therefore, with a personal wallet, while you can make the argument that holding crypto in this type of personal wallet is similar to holding money in your house — which is not reportable — the same would not hold true for a foreign bank account that contains cryptocurrency.

Foreign Bank Accounts are Not Personal Wallets

The IRS never said that holding cryptocurrency in a bank account exempts reporting of that type of foreign bank account. All the IRS has said is that they have not yet promulgated rules re: cryptocurrency reporting.

In other words, there is no rule that says a foreign bank does not have to be reported solely because it holds crypto. Rather, the general rule is that foreign bank accounts have to be reported, and just placing cryptocurrency into a foreign account would not necessarily negate the rule that foreign bank accounts must be reported.

But Gold and Previous Metals are Not FBAR Reportable?

That is only partly correct. If you have gold in your home, then it is not reportable. If you have gold in a bank lockbox in a Foreign Financial Institution that the bank can access, then it may be reportable.

Result: The IRS is not saying foreign bank accounts would not have to be reported if it has cryptocurrency in it. Otherwise, people could avoid reporting by simply depositing some cryptocurrency into a bank account that accepted cryptocurrency deposits. We are pretty sure this was not the IRS and FinCEN’s goal re: compliance.

if you have a foreign bank account holding cryptocurrency, you probably have to report it — or realize if you don’t, the IRS may disagree at a future date and try to issue penalties (which you can fight at that time).

Holding Cryptocurrency on a Foreign Exchange

Here is where it gets a little more complicated.

Some courts have ruled that while some foreign investment accounts and other related accounts need to be reported, others do not. For example, some courts have held that certain types of accounts such as poker accounts may have to be reported in part and not reported in part. See Case: John Hohm

Overall, if you have your cryptocurrency being held on a foreign exchange, and you have an account number and can access the money —  the IRS is probably going to say this is considered a foreign account and therefore it should be reported.

Foreign Mutual Fund

We represent numerous entrepreneurs, and some who have begun managing cryptocurrency investment funds abroad, which are pooled funds of different cryptocurrency which is continually being treated and sold. In general, Mutual Funds, ETF, Equity funds and other funds have to be recorded on the FBAR.

Therefore, expanding on the examples from above, if you have an account number designated as part of a pooled fund of cryptocurrency which is being traded and sold —  you would be hard pressed to argue that this is not a reportable account when you have sufficient control and access over a foreign fund, in order to withdraw or trade the assets held in the pooled fund.

Unless the IRS specifically exempts cryptocurrency managed fund from reporting, chances are it should be reported.

FATCA Cryptocurrency Reporting (Form 8938)

Form 8938 is related to FATCA. FATCA is the Foreign Account Tax Compliance Act which is an act designed to facilitate reciprocal financial reporting between United States and more than 110 different countries and over 300,000 Foreign Financial Institutions, with the goal of promoting financial transparency and reducing offshore evasion, fraud, money laundering, etc.

Countries are losing out on billions of dollars worth of tax income because offshore income continues to go unreported.

With that said, it is import to understand the concept of financial transparency when determining whether you have reporting requirements with respect to cryptocurrency.

Cryptocurrency is not Currency to the IRS

Under U.S. tax law, the IRS does not deem cryptocurrency as currency. Rather, it is considered property. Therefore, when you are thinking about the term property, one way to think about it is in terms of assets. 

Property is a type of Asset.

Likewise, form 8938 requires individuals to report Specified Foreign Financial Assets

That is your baseline position in determining whether your particular asset (here, cryptocurrency) is the type of asset that must be reported on form 8938.

Examples of Reportable Assets

Some examples of foreign financial assets that are reportable (if the threshold is met) on IRS form 8938 are the following:

  • Financial (deposit and custodial) accounts held at foreign financial institutions
  • Foreign stock or securities not held in a financial account
  • Foreign stock or securities held in a financial account at a foreign financial institution (Not the individual stock)
  • Foreign partnership interests
  • Foreign-issued life insurance or annuity contract with a cash-value
  • Foreign hedge funds and foreign private equity funds

Does Cryptocurrency Qualify as one of these assets?

Cryptocurrency is not a stock or security. Also, it is not a “business” interest, and it is not insurance.

But…How do you Hold Your Cryptocurrency?

Whether or not cryptocurrency qualifies as a reportable foreign financial asset would depend on who you ask (FinCEN vs. IRS) and what the context of the question is.

Unfortunately, there is some ambiguity between the different governing bodies (both domestic and abroad) as to what qualifies as property vs. currency.

Where is your Cryptocurrency being Held?

The biggest hurdle in excluding your cryptocurrency as a non-reportable asset is going to be whether a financial exchange or account is considered a Specified Foreign Financial Asset for purposes of reporting.

Learn More About Form 8938 and Cryptocurrency Reporting

Cryptocurrency & Form 8621 (PFIC)

Are You Holding Crypto in a Foreign Investment Fund?

These days, people are getting very creative – which is awesome.

There’s a new breed of Venture Capitalist/Hedge Fund Manager who very creatively uses cryptocurrency as the currency of choice in trading.

If you happen to have your money sitting in a fund abroad, which is being managed by a hedge fund or other venture capitalist/managed fund, chances are you may have to file a Form 8938 and/or possibly a form 8621 if you are inching towards the investment taking shape as a Mutual Fund, ETF, or Foreign Investment fund. 

Crypto-Funds May Be a PFIC

A PFIC is a Passive Foreign Investment Company.

The reason why this is important to you is because if your investment fund is considered a PFIC then you will have some significant IRS reporting — depending on whether you meet the threshold reporting requirements or not.

Depending on how long you hold the fund for, and whether you are receiving dividends ,interest capital gains, royalties, etc. —  and/or whether the dividends are being accrued (but not distributed) – you may be in for a a very complicated tax analysis, especially if you have excess distributions

Cryptocurrency & Form 3520

IRS Form 3520 is a form that is used to report a gift that is received from a foreign person or foreign business – and  is also used when you receive a distribution from a foreign trust.

If you receive cryptocurrency as a gift from a foreign person, or from a foreign business or trust, then chances are you are going to have to report it, assuming it meets the threshold requirements for reporting

Typically, the threshold requirement is that if the value of the gift is more than $100,000 dollars from a foreign person or more than ~$15,000 from a foreign business, then it has to be reported in the year you receive the gift.

The gift does not have to be one transaction,  it can be a series of transactions.

**If you have a foreign trust involving Cryptocurrency, you may need to consider a Form 3520-A

Cryptocurrency Amnesty

The rules have changed, but you still have options.

Depending on the facts and circumstances of your situation, your options may include the streamlined program, reasonable cause, or the delinquency procedures – which may result in significantly reduced fines and penalties (and may even receive a penalty waiver).

IRS Offshore Reporting & Tax Amnesty Programs

There are 5 main versions of the program. Here are the 5 Main Options:

(New) Updated Traditional IRS Voluntary Disclosure Program

When OVDP (Offshore Voluntary Disclosure Program) ended back in September 2018, the Internal Revenue Service was unclear as to whether a New “Offshore” Voluntary Disclosure Program would be introduced. Instead of a “new program,” the traditional voluntary disclosure program was expanded.

You can use the disclosure program to submit FBARs for your Foreign Bank Accounts, FATCA, PFIC, along with your Domestic Income

Resource: Summary of the Traditional IRS Voluntary Disclosure Program

Resource: Golding & Golding’s 8-Step Guide to See if you Qualify

SFCP – IRS Streamlined Filing Compliance Procedures

IRS Streamlined Filing Compliance Procedures are a stand-alone “streamlined” version of the traditional OVDP. The “stand-alone” streamlined filing procedures were created in 2014 by the Internal Revenue Service.

The purpose of the procedures are to assist taxpayers who were noncompliant with offshore reporting requirements – but were also non-willful.

If the Taxpayer can certify under penalty of perjury of being non-willful, the IRS reduces the penalty structure, and even waives the penalty for applicants who qualify as foreign residents.

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Filing Compliance Procedures

SDOP – IRS Streamlined Domestic Offshore Procedures

SDOP is the Streamlined Domestic Offshore Procedures, and it is the program designed for for U.S. persons residing in the United States (or do not meet the technical “Foreign Resident Test”) 

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Domestic Offshore Procedures

SFOP – IRS Streamlined Foreign Offshore Procedures

SFOP is the Streamlined Foreign Offshore Procedures. These are the Procedures for U.S. persons residing outside the United States is referred to as the Streamlined Foreign Offshore Procedures.

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Foreign Offshore Procedures

DIRP – Delinquency Procedures for Offshore & Foreign Accounts and Assets

If you do not have any unreported income resulting in having to amend your tax returns — and all you have is unreported foreign assets, accounts or investments with no unreported income, you may be in luck. In these instances, in which you do not otherwise need to file for traditional offshore disclosure or the Streamlined Filing Compliance Procedures — you may qualify for the Delinquency Procedures and avoid any penalties.

Resource: Golding & Golding’s IRS Summary of Delinquent International Informational Return Submission Procedures

RC – Reasonable Cause for Offshore & Foreign Accounts and Assets

Reasonable Cause may be an option for some taxpayers. Specifically, if you were completely non-willful in your failure to disclosure, and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd.

Resource: Golding & Golding’s Summary of IRS Reasonable Cause for Offshore & Foreign Accounts & Assets

Fixing Lesser Experienced Law Firm mistakes.

IRS Voluntary Disclosure is complex enough for experienced practitioners who focus exclusively in the area of law, never mind relative newcomers who are trying to handle more than just offshore voluntary disclosure as part of their everyday tax practice.

We know, because those cases usually end up on our door-step. 

Resource: Examples of recent cases we had to takeover from less experienced Attorneys can be found by Clicking Here (Case 1) and Clicking Here (Case 2).

IRS Offshore “Potential” Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

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.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, 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.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, 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, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

How to Find Experienced & Reputable Offshore Voluntary Disclosure Counsel

Nearly all the experienced Attorneys in this field will have 5 Main Attributes:

  • Board Certified Tax Law Specialist
  • Master’s of Tax Law (aka LL.M.)
  • Dually Licensed as an Enrolled Agent or CPA
  • Around 20-Years of Private Practice experience
  • Extensive Litigation, Trial and related high-stakes experience.

Why is This Important? Because People Can be Whomever They Want to be Online

And that is the problem.

In recent years, we have had many clients come to us after being horribly represented by inexperienced tax counsel. While we are sure it is a problem in many fields, it seems to run rampant in IRS offshore voluntary disclosure.

These Attorneys ‘manipulate’ their past legal experiences, such as working for the IRS —  to make themselves sound more experienced than they are. You later find that they never worked as an attorney for the IRS, or even in the offshore disclosure department.  

The IRS has nearly 100,000 employees, and just being one of them does not make an attorney qualified to be an effective and experienced offshore voluntary disclosure tax attorney specialist.

IRS Offshore Disclosure is complex enough for experienced practitioners who focus exclusively in the area of law, never mind relative newcomers who are trying to handle more than just offshore voluntary disclosure as part of their everyday tax practice.

International Offshore Disclosure Lawyer Fees – How Much are They?

As in life, you get what you pay for.

To get the best representation possible, you need an experienced Board Certified Tax Law Specialist, with advanced degrees and advanced certifications.

If you want to hire a newer private-practice attorney that just opened shop a few years ago, hoping to save a little money on fees,  where they sold you on some “over-hyped” Kovel Letter – you’re putting yourself at risk.

Those cases usually end up on our doorstep down the line after the attorney made significant mistakes on the submission (sometimes costing the client significant amounts of time and fees that could have been avoided)

Golding & Golding – Board Certified in Tax Law

Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1000 streamlined and voluntary disclosure submissions.

Our Team Lead is a Board Certified Tax Law Specialist (Less than 1% of Attorneys nationwide) and Enrolled Agent, with a Master’s of Tax Law (LL.M.)

Mr. Golding leads his team in each and every case we accept for submission.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

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.)
International Tax Lawyers - Golding & Golding, A PLC