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Cryptocurrency & FATCA Form 8938 (2018) – Crypto a Financial Asset?

Cryptocurrency & FATCA Form 8938 (2018) – Crypto a Financial Asset? (Golding & Golding)

Cryptocurrency & FATCA Form 8938 (2018) – Crypto a Financial Asset? (Golding & Golding)

Cryptocurrency & FATCA Form 8938 (2018) – Crypto a Financial Asset? 

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.

TL;DR

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.

IRS Offshore Penalty List

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.

FATCA Form 8938

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.

A Penalty for failing to file Form 3520

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. 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

Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). 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

Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. 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

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. 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

Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. 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

Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. 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.

IRS Voluntary Disclosure of Offshore Accounts

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 for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.

Common Un-filed IRS International Tax Forms

Common un-filed international tax forms, include:

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 IRS Offshore Voluntary Disclosure.

IRS Voluntary Disclosure of Offshore Accounts

There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:

  • Offshore Voluntary Disclosure Program (OVDP)
  • Streamlined Domestic Offshore Procedures (SDOP)
  • Streamlined Foreign Offshore Procedures (SFOP)
  • Reasonable Cause (RC)

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.

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