FATCA Cryptocurrency – Form 8938 Asset | IRS FATCA Cryptocurrency
FATCA Cryptocurrency – Form 8938 Asset | IRS FATCA Cryptocurrency
FATCA Cryptocurrency: The IRS has yet to issue set regulations for FATCA Cryptocurrency reporting on Form 8938.
Under most circumstances, if you have your cryptocurrency on a Financial Exchange, in a Crypto Bank Account, or you invested in a Crypto Managed Fund, you may have a Form 8938 filing requirement.
FATCA Cryptocurrency (Form 8938)
There is a likelihood that once the dust settles, and the IRS issues regulations, etc. that cryptocurrency is going to have to be reported on an IRS Form 8938 when the cryptocurrency is held in either a foreign exchange, bank account, or fund.
If the crypto currency is instead held in a personal wallet, while the IRS has not specifically stated it is excluded – there is an argument to be made that a personal wallet is not a “Foreign Financial Asset” and therefore the cryptocurrency would not be reported on form 8938.
What is 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.
Are You Holding Crypto in a Foreign Bank?
Cryptocurrency has evolved. Recently, Binance announced that the company set up its own bank account in Malta. Presumably, if your cryptocurrency is being held in an offshore location in something called “a bank account” chances are you’re going to have to report it on your Form 8938.
** If a foreign bank is actually a branch of the US institution, you may be able to avoid disclosing it under one of the form 8938 exceptions.
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
Is Your Cryptocurrency in a Foreign Exchange?
Essentially, cryptocurrency exchanges are online platforms where individuals can exchange cryptocurrency. There are various different versions of exchanges, depending on if the trading is being done person-to-person or through a representative/broker/third party.
The main purpose behind exchange is that individuals can purchase and sell cryptocurrency, just like a typical stock market.
Even though cryptocurrency is not considered a security, if you were trading your cryptocurrency online, and it is being stored in something similar to a Foreign Financial Institution — you may have to report.
What Does the IRS Say?
It is important to remember that the goal of FATCA and offshore reporting in general is transparency.
While we are not proponents in general of invading people’s privacy, we want to at least try to explain to you how the IRS operates so you can make an informed decision moving forward.
It was up to the IRS, everyone would report everything about everything to the IRS. Your goal is to try to find legal ways to avoid reporting, without getting yourself into trouble.
What if I Do Not Report?
If you are required to report your cryptocurrency on Form 8938 but do not do so, the penalties alone for Form 8938 can reach $60,000, but that is just to drop in the bucket compared to other potential penalties you may be hit with depending on the facts and circumstances of your noncompliance.
What Can You Do?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
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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.