Cryptocurrency IRS Offshore & Foreign Reporting (2018 Update)
Unfortunately, at the time of writing of this article, the U.S. government agencies responsible for International and Offshore Reporting (FinCEN and the IRS) have not set any concrete rules reporting the reporting and disclosure of foreign cryptocurrency.
The rules are unclear and misguided at best, and now that the IRS has joined J5 — an international enforcement group dedicated to combatting tax evasion involving cryptocurrency — it is important to do your best to stay (or get into) in IRS compliance.
- 1 Cryptocurrency – Tax vs. Reporting
- 2 Our Take on the Reporting Rules
- 3 Do I File an FBAR for Cryptocurrency?
- 4 Personal Bank Accounts & Foreign Bank Accounts
- 5 Holding Cryptocurrency on a Foreign Exchange
- 6 Foreign Mutual Fund
- 7 What is Form 8938?
- 8 Form 8621 (PFIC)
- 9 Form 3520
- 10 Risks of Non-Reporting of Cryptocurrency
- 11 What can the IRS Do To Your Money?
- 12 Golding & Golding, A PLC
Cryptocurrency – Tax vs. Reporting
If you are a U.S. Person and would otherwise owe tax money to the IRS due to cryptocurrency sales, exchanges, or capital gain, you are still required to pay tax to the U.S. — even if the sale was abroad.
As to FBAR, FATCA and other international reporting, the IRS has not been completely clear, as the laws are still evolving — but you should keep in mind that in particular, government agencies are not known to play fair.
Just because you do not report now, does not mean in the future that either one of these government agencies will not “look-back” and say you should have reported.
They will say something like, “We never said you definitely did not have to report, all we said is you may not need to report.”
Government agencies are like that…
Our Take on the Reporting Rules
We are going to provide you our take on what needs to be reported. This is not the law; it is just guidance to try and help you make sense of the rules.
We understand that many people want stay anonymous.
Just keep in mind that staying anonymous directly contradicts the goal of the IRS wanting to know all of your financial information (a.k.a. financial transparency).
Whether it is FATCA, CRS (non-U.S. FATCA equivalent law), the IRS joining J5, or the creation of several different ITEG (International Tax Enforcement Groups) – the world in general is moving towards financial transparency.
That does not mean we agree with full financial transparency (we don’t) — it just means the IRS is probably going to err on the side of “it should’ve been reported.”
Do I File an FBAR for Cryptocurrency?
Here is a breakdown of when you may need to report cryptocurrency.
Personal Bank Accounts & Foreign Bank Accounts
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 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.
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.
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
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
Risks of Non-Reporting of Cryptocurrency
A CTR is a Currency Transaction Report. It’s typically filed when the bank receive deposits of more than $10,000. Therefore, if you have several transactions of more than $10,000 of cryptocurrency hitting your account from a foreign exchange, or other owner of cryptocurrency, you may have to be careful about non-reporting.
So can’t I just receive deposits of less than $10,000?
Don’t Forget About… SAR
The US government already knows your immediate knee-jerk reaction of knowing that a CTR is filed when a person deposits more than $10,000 is to deposit less than $10,000.
Therefore, the alternative form a Financial Institution may file is called the Suspicious Activity Report (SAR).
This form is filed when a person at the institution believes that some of the deposits or related transactions are suspicious. Therefore, even if depositing $9000 into your account may not necessarily lead to a CTR being filed, the bank may still file an SAR – which would lead to more inquiries because while a CTR is more routine, an SAR says that the institution smells trouble.
What can the IRS Do To Your Money?
Here are a few common tactics the IRS will use:
The IRS can issue a levy against your bank account with the intent to take all of the money sufficient to recoup the penalties against you (plus interest). You have the opportunity to dispute the Levy, but it is crucial that you respond notice of intent To levy in a timely manner. Also, if the foreign money is already spent the IRS can still go after other money – in other words, the IRS is not limited to only trying to levy the actual foreign money that was transferred to the United States.
In order to recoup penalties the irises issued against you, the IRS can also lien your property. Typically, the IRS does not force the sale of the home, but it is a possibility, although very unlikely. In addition, as with the levy, the IRS is not limited to property that was purchased with the foreign money. The IRS can lien whatever property necessary to recoup the penalties due and owing.
A seizure is a more complicated scenario, because with the seizure the IRS does not give sufficient notice or “pre-warning” — so that you do not have time to move the asset before the IRS “seizes it.” This method is typically intended for individuals who a laundering large amounts of money, and/or are criminals, or intending to go on the run.
Golding & Golding, A PLC
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