Offshore Cryptocurrency Reporting (IRS Summary 2019-2020)
Offshore Cryptocurrency & IRS: How to Report (2019-2020): The IRS rules for offshore reporting, and specifically foreign cryptocurrency reporting on FBAR & FATCA Form 8938 are still in flux. With the 2019 tax returns coming due, and many foreign cryptocurrency investors getting antsy — Golding & Golding wanted to provide some guidance — so we updated our analysis of offshore reporting for Bitcoin and other virtual currency. Since many clients still refer to Cryptocurrency as Bitcoin, we will use these terms interchangeably. When cryptocurrency has no offshore aspect to, then acronyms like FATCA and FBAR do not apply. But, if the cryptocurrency is located outside the Unites States, either on an exchange, in a bank account or pooled funds, then IRS international reporting will become an issue.
We will summarize the reporting rules, as we would (generally) recommend to clients. Of course, this is NOT legal advice – just our thoughts, as we previously recommended in a recent Forbes Article.
Offshore Cryptocurrency Reporting
With the Internal Revenue Service aggressively enforcing reporting requirements, and making foreign accounts compliance a key enforcement priority – it is important to understand the rules and requirements. For those clients with prior year issues, they may qualify for one of the FBAR Amnesty or FATCA Amnesty programs – collectively referred to as Offshore Voluntary Disclosure.
The AICPA did publish its own set of recommendations about 6-months ago based on a communication with the IRS. But, in reviewing those recommendations, it does not appear to account for various potential pitfalls. For example, what if the cryptocurrency is in a bank account or pooled funds, as many exchanges now offer.
In addition, while the IRS may provide some grace-period if there are retroactive reporting requirements, it may also increase the chance of a future potential audit. Conversely, if you do your best to comply now, it may go a long way to provide non-willfulness.
The FBAR is used to report Foreign Bank and Financial Accounts. It is more than just bank accounts. So, with cryptocurrency there are three main situations to consider:
A. Personal Wallet
Chances are, if you hold your offshore cryptocurrency in a personal wallet on your computer, it would not be reported on the FBAR. Why? Because a personal wallet is neither an exchange nor a bank account. Therefore, it would not qualify as holding your cryptocurrency in a “foreign financial institution” or FFI. In addition, it would be pretty tough for the IRS to claim your personal flash drive is really a financial institution.
B. Foreign Bank Account (or Similar)
Some companies offer to hold your cryptocurrency in a foreign account, analogous to a bank account. If it is a situation where your cryptocurrency is being stored in an account, with a personal identifier such as an account number, you may consider reporting. Remember, the IRS is not into splitting hairs. Therefore, if the cryptocurrency is being held in an “account” at an electronic storage facility that would qualify as an FFI or similar, then the IRS may require reporting.
C. Foreign Exchange
The analysis will vary based on various factors. But, at the end of the day, if the exchange is considered foreign, and a person’s cryptocurrency “account” or storage may be identified through an account number or other personal identifier, reporting may be required. Even of the exchange is offering anonymity….so did Coinbase, and that did not work out so well for the investors (see below).
FATCA Form 8938 Cryptocurrency Reporting
FATCA is the Foreign Account Tax Compliance Act. Unlike the FBAR, which t is used to report foreign accounts — FATCA is used to report foreign assets. And, the IRS has indicated that cryptocurrency is not currency. Therefore, if cryptocurrency is not currency, then it would be considered a form of property. Property is generally an asset, especially when it is used as a form of investment.
Thus, if a person owns a foreign asset, there may be a reporting requirement. The rules involving the reporting of assets are much more complex than accounts on the FBAR, and you should speak with a specialist to assist you understand the reporting options.
There are new investment pools involving cryptocurrency. Some of these investment pools are equivalent to mutual funds, EFT, and REIT. As a result, while the cryptocurrency that is being stored in your personal wallet may not be reportable, once it is invested into a fund – it may be come reportable.
*This could require additional reporting using international reporting forms such as Form 8621 (PFIC) and 3520-A (Foreign Trust).
IRS Enforcement Initiatives
The IRS has begun the intense enforcement of international (and domestic) cryptocurrency tax and reporting. There have been several recent developments in the past few years. Moreover, the Internal Revenue Service is angling more toward criminal investigations in situation in which they believe there is an element of fraud and evasion.
The Letter 6174 was issued by the IRS to put people on notice that the recipients of the letter may have a tax liability issue regarding the trading or sale of cryptocurrency.
J5 is an International initiative designed to hunt down offshore tax evaders — with a specific focus on offshore cryptocurrency.
Coinbase was issued a Subpoena a few years back. The subpoena was disputed, but then Coinbase relented, and turned over more than 12,000 names of U.S. account holders.
The IRS recently stated that they are further turning up the heat on cryptocurrency, and that criminal enforcement of cryptocurrency is a very real priority.
Golding & Golding (Board-Certified Tax Law Specialist)
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
- Learn more about the Board-Certified Tax Lawyer Specialist credential
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We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Beware of inexperienced counsel trying to mislead you about the Streamlined Procedures or Reasonable Cause.
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.
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.