Understanding The Rules of Bitcoin Reporting for FBAR & FATCA
Bitcoin FBAR & FATCA Tips for Compliance and Offshore Disclosure.
At Golding & Golding, we focus our entire tax law practice exclusively on IRS Offshore Voluntary Disclosure. A big part of IRS Offshore Voluntary Disclosure is FBAR Reporting, and it may include crypto-currency.
Unfortunately, at the current time, neither the IRS nor FinCEN have provided written materials to rely on in order to determine whether your Bitcoin or other Crypto-Currency must be included on the FBAR.
As recently as November 2017, a representative from FinCEN indicated at a conference that FinCEN would not expect the reporting of Crypto-Currency at this time, but they also indicated that the law/reporting is still evolving.
Moreover, the representative did not provide anything in writing (so it cannot be easily relied upon) and did not make any distinction between holding Crypto-Currency in an account versus holding it in a personal wallet.
FBAR vs. FATCA
A distinction needs to be made between FBAR and FATCA.There are different reporting requirements between the FBAR and FATCA. Although FinCEN is responsible for drafting information regarding FBAR — ever since 2003, the IRS is responsible for enforcement.
FBAR is used to report foreign “accounts.” FATCA is used to report specified foreign financial “assets” directly on your tax returns (Form 8938, etc.). Therefore, depending on whether your cryptocurrency is in an account or personal wallet, and depending on whether the IRS views cryptocurrency as either a foreign financial asset or just property, you may be required to file various different forms.
Unlike FBAR, FATCA is a law that was prepared by and enforced via the IRS. And, since the IRS does not view Crypto-Currency as “currency” but rather as “property,” there is concern that it should be reported as a type of Specified Foreign Asset, per FATCA.
The FATCA wording used to describe the reporting is very ambiguous, because it is still unclear as to whether Crypto-Currency should be considered an asset that would be reported (stock) versus a typical non-reportable asset (gold).
Our Thoughts on the FBAR and Cryptocurrency
We receive numerous inquiries regarding this issue. And, while we truly enjoy writing articles on all areas involving international tax compliance, we are not the black letter law and cannot be relied on in preparing your own taxes. In addition, we do not represent clients outside of offshore disclosure and we do not provide guidance solely on bitcoins – only as it relates to offshore disclosure.
Based on prior memorandums and relatable IRS information in general, here is most likely what needs to be reported (or not reported):
Without boring you too much…a bit of history. The FBAR is a creation of FinCEN. Up until 2003, FinCEN handled the enforcement aspect of FBARs, but that shifted to the IRS in 2003.
Therefore, it is a tough situation because while the line instructions in preparing the FBAR (aka FinCEN 114) is drafted by FinCEN — the enforcement is by the IRS. And at the current time, the IRS is going full force to investigate all issues related to Crypto-Currency. This includes the recent victory by the IRS against Coinbase.
Thus, it is safe to presume the IRS will be enforcing these types of laws against individuals. And, it may be better to err on the side of caution – especially if you have an account overseas and not just a personal wallet.
If you are a US person, but reside overseas and have a personal wallet on your home computer in which you maintain Crypto-Currency, chances are it does not need to be reported and we would not recommend reporting it at this time. It is not an account, there is no account number — and therefore simply having a personal wallet on your computer is probably not considered an “account” under FBAR reporting.
If you maintain your Crypto-Currency with a provider such as Coinbase, you have an account number, and the location of the account is outside of the United States, chances are you may have to include it on the FBAR. We are not telling you that you have to include it at this time, because there is no particular law for guidance on that matter currently, but here’s an example:
If you own shares of stock or trading account directly such as a share of Apple – it is not included on the FBAR. Conversely, if you own a trading account that may have stocks and other items within it, then typically you report the account number – not each individual share of stock.
So, is having Crypto-Currency within an account considered an asset that needs to be reported? Our thought would be – if it is an account and it has an account number, then you should consider reporting it (even if not directly required at this time) because obviously the IRS is going full force in enforcing Crypto-Currency rules and the IRS does not like to split hairs.
The IRS is Skeptical of Crypto-Currency
The IRS is skeptical regarding this issue and therefore, it may not hurt you to report the account. With that said, it is a decision for each person to make, individually, in speaking with their own tax preparer, CPA, enrolled agent, or tax attorney.
Regular “Bank” Account
As Crypto-Currency evolves, there are some types of hybrid accounts that maintain both regular money and other shares of stock, as well as Crypto-Currency. Thus, the mere fact that Crypto-Currency is located within the account should not otherwise eliminate the requirement to report the account.
Stated another way, just by putting Crypto-Currency into a regular hybrid type of bank account would not negate you from having to report that bank account, just because it also contains Crypto-Currency.
FATCA is the Foreign Account Tax Compliance Act. It is different than the FBAR, because it has always been enforced by the IRS and not some other government faction. When it comes to reporting under FATCA, it requires the reporting of Specified Foreign Financial Assets – if you meet the threshold reporting requirement.
The question of whether Crypto-Currency is considered a Specified Foreign Financial Asset can be argued either way. While the name Crypto-Currency uses the term “currency,” it is not viewed as currency by the IRS. It is an investment, and while people like to make the jump that it is similar to investing in gold, that is really not the case. Crypto-Currency feasibly could go on forever, while there is only a finite amount of gold.
If the Crypto-Currency is an account, you should probably report it. If the Crypto-Currency is not an account, then it is for each person to decide whether to report it. For example, if a person owns real estate (unless owned in a corporation), it is not reported under FATCA. Conversely, if a person owns a share of stock, it is reported in the tax return even if it is not within an account (in other words, individual shares of stock are reportable under FATCA even though it is not reportable in the FBAR).
Since the IRS designates Crypto-Currency as property, it is ambiguous as to whether it is property such as real estate or property such as a specified foreign asset. As we indicated above, since the IRS recently fought for and won a subpoena against Coinbase, the IRS is taking this matter seriously.
In the end, the decision whether to report or not should be up to each individual, along with his or her tax professional.
IRS Offshore Voluntary Disclosure
If you are already out of compliance for Bitcoin and other accounts/assets, one of the safest methods for getting back into compliance is through one of the approved IRS Offshore Voluntary Disclosure Programs (aka IRS Amnesty Program)
Getting into IRS Offshore Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
5 IRS Methods for Offshore Compliance
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Reasonable Cause
- Quiet Disclosure (Illegal)
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property (reduced by any outstanding mortgage) would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
4. Reasonable Cause
Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.
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