Cryptocurrency Taxable Events - IRS vs. FinCEN & Property vs. Currency - Golding & Golding

Cryptocurrency Taxable Events – IRS vs. FinCEN & Property vs. Currency – Golding & Golding

Cryptocurrency Taxable Events – IRS vs. FinCEN & Property vs. Currency

The Internal Revenue Service is starting to get the lay of the land when it comes it cryptocurrency. No longer shrouded in mystery and intrigue, cryptocurrency has moved into the mainstream.

Recently, the IRS discussed the various types of cryptocurrency events that IRS may consider taxable. 

Cryptocurrency Taxable Events

When it comes to the taxation of Bitcoin/Cryptocurrency, there is mass confusion in the marketplace –primarily due to the fact that there are many stones left unturned by the IRS, FinCEN, and foreign tax jurisdictions etc. when it comes to deciphering cryptocurrency. 

Key unanswered questions include:

  • Is Cryptocurrency…Currency?
  • Is Cryptocurrency…Property?
  • How is Cryptocurrency taxed?
  • Are Foreign Crypto Accounts/Wallets FBAR/FATCA reportable?

Cryptocurrency Taxes

*Since so many people use Bitcoin interchangeably with cryptocurrency, we will refer to them together within this article.

Each one of these distinctions is very important, because it helps to assess whether a person is liable for U.S. tax or not, and/or whether the person is in compliance with IRS and FinCEN foreign account and asset reporting rules — especially because the failure to be in compliance may result in significant fines and penalties.

The following is a breakdown summary of the basics:

Defining Bitcoin/Cryptocurrency

While Cryptocurrency is generally referred to as currency, it actually depends on who you ask.

IRS & Bitcoin/Cryptocurrency

For example, in accordance with the IRS, cryptocurrency is not considered currency at all. Rather it is considered property – and that will have a major impact when it comes to taxation (see below)

FinCEN & Bitcoin/Cryptocurrency

Likewise, under FinCEN, cryptocurrency is defined as something that has some of the attributes of Currency, but not all of the attributes of real currency. This is even more confusing, since for example the FBAR (FinCEN 114) is actually enforced by the IRS.

Foreign Country & Bitcoin/Cryptocurrency

Outside of the United States, the rules are also different. Some countries do not tax cryptocurrency, some countries tax cryptocurrency at a reduced tax rate — and even the definition of cryptocurrency is different and varies from country-to-country.  For example the European banking authority describes cryptocurrency as a “digital representation of value…. accepted by natural legal persons as a means of payment.”

The takeaway from all this? Is that while it is unclear what the specific definition update Bitcoin/Cryptocurrency is, under U.S. law there is a strong indication that per IRS Rules, cryptocurrency is not technically currency and should not be thought of as currency when exchanging, purchasing or selling it.

A Friendly Reminder that What Goes Up…

…Usually comes down.

It is important to note, that while currently (aside from a recent hiccup) the value of cryptocurrency continues to rise —  this is not always the case.  Throughout its inception (since 2009), cryptocurrency has seen many ups and downs, including a complete crash in 2013, as well as various instances of hacking, theft, and other unwanted intrusions.

It is important to track your particular cryptocurrency, because depending on whether or not there is a breach of your wallet would not necessarily negate any tax liability you may have for the exchange or sale of Bitcoin in that same year.

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 bases 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 it again 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.

Reporting Foreign Bitcoin/Cryptocurrency

This is where it can get infinitely more complicated, primarily because of the lack of direction by the U.S. Government, coupled by the penalties associated with noncompliance of required foreign disclosure activities.

Here are the basics:

FBAR /FinCEN 114

FBAR  (Report of Foreign Bank and Financial Account form) was created by FinCEN, is now enforced by the IRS. If a person has more than $10,000 on any day of the year in foreign accounts (not limited to bank accounts), then the person is required to disclose this information annually on an FBAR.  The failure to properly report may result in penalties stemming from a warning letter, all the way up to a 100% penalty in a multiyear audit.

Do You have to report foreign held cryptocurrency?

FinCEN and the IRS are not clear.  Since the IRS has determined that cryptocurrency is actually property and not currency, common sense would dictate that it would not need to be reported on the FBAR…since the FBAR it Is used to report foreign accounts.

But not so fast….

FBAR Rules are Contradictory

The FBAR rules can be confusing. For example, a safety deposit box in the bank would not be considered an account, and if you read various blogs, they would all say that a safety deposit box is not considered an account. The blog will also tell you the precious metals and stones of course do not need to be reported.

But, if you refer to the Internal Revenue Manual you will find the following clarification:

Ssfety Deposit Box

A reportable account may exist where the financial institution providing the safety deposit box has access to the contents and can dispose of the contents upon instruction from, or prearrangement with, the person.

Precious Metals, Precious Stones, or Jewels Held Directly by the Person

31 USC 5314 defines “foreign financial agency” as “a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.”

Therefore, a reportable account relationship may exist where a foreign agency holds precious metals on deposit or provides insurance or other services as an agent of the person owning the precious metals.

In other words, the information can be conflicting. This is primarily because even though the FBAR is being enforced by the IRS (and they have their own internal Revenue manual),  the form was created by FinCEN, which has its own enforcement standards.

In other words, be careful with reporting or non-reporting cryptocurrency,

Remember the Purpose of Foreign Reporting

From the IRS and FinCEN’s perspective, the purpose of filing the FBAR and other related international informational returns is to promote transparency. Typically, the Government and courts will err on the side of the U.S. government as opposed to splitting hairs and throwing support behind nuances argued by people seeking to avoid reporting and/or maintain anonymity.

Presumably, if you were ‘holding’ the cryptocurrency in your own personal wallet on your own personal computer, chances are it would not be reported.

But, the further away you drift from that situation, the more you have to consider whether you should report.

For example:

  • Is there virtual currency and regular currency in the same account?
  • Have you exchanged the currency for cash and left it in the trading account?
  • How much cryptocurrency do you actually have in the foreign Account

It is important to know that in recent months enforcement of Bitcoin/Cryptocurrency has been stepped up. Specifically, with the courts approving a slimmed-down version of the IRS subpoena against Coinbase, your information is nowhere near as private or anonymous these companies would like you to believe it is.

** In addition to FBAR, you may also have other reporting requirements under FATCA, Form 3520, Form 3520-A and Form 8621 (amongst others).

Are you out of Compliance?

If you are already out of compliance for not properly reporting or paying tax involving your cryptocurrency, you may consider getting into compliance before it is too late.

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.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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

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

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

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

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

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

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.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

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

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