Cryptocurrency Enforcement a Tax Priority – IRS Pursues Crypto Taxes
- 1 Cryptocurrency Tax Basics
- 2 Cryptocurrency Reporting
- 3 Do I File an FBAR for Cryptocurrency?
- 4 Holding Cryptocurrency on a Foreign Exchange
- 5 Foreign Mutual Fund
- 6 FATCA Cryptocurrency Reporting (Form 8938)
- 7 Cryptocurrency & Form 8621 (PFIC)
- 8 Cryptocurrency & Form 3520
- 9 Cryptocurrency Amnesty
- 10 Golding & Golding, A PLC
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.
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.
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.
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
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).
Golding & Golding, A PLC
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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. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.