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FBAR Cryptocurrency (2018) – Important Cryptocurrency Reporting Tips

FBAR Cryptocurrency (2018) - Important Cryptocurrency Reporting Tips (Golding & Golding)

FBAR Cryptocurrency (2018) – Important Cryptocurrency Reporting Tips (Golding & Golding)

FBAR Cryptocurrency (2018) – Important Cryptocurrency Reporting Tips

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 cryptocurrency.

Common questions we receive about Cryptocurrency FBAR:

  • Do I report all cryptocurrency on an FBAR?
  • Do I report overseas cryptocurrency on the FBAR?
  • How do i report cryptocurrency on the FBAR?
  • What if I didn’t report cryptocurrency on the FBAR?
  • Will the IRS penalize me?
  • Can I go to jail?

Cryptocurrency FBAR

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 Cryptocurrency must be included on the FBAR.

Recently, a representative from FinCEN indicated at a conference that FinCEN would not expect the reporting of Cryptocurrency 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 Cryptocurrency 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 Cryptocurrency 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 Cryptocurrency 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):

FBAR

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 Cryptocurrency. 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.

Personal Wallet

If you are a US person, but reside overseas and have a personal wallet on your home computer in which you maintain Cryptocurrency, 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.

Trading Account

If you maintain your Cryptocurrency 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 Cryptocurrency 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 Cryptocurrency rules and the IRS does not like to split hairs.

The IRS is Skeptical of Cryptocurrency

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 Cryptocurrency evolves, there are some types of hybrid accounts that maintain both regular money and other shares of stock, as well as Cryptocurrency. Thus, the mere fact that Cryptocurrency is located within the account should not otherwise eliminate the requirement to report the account.

Stated another way, just by putting Cryptocurrency into a regular hybrid type of bank account would not negate you from having to report that bank account, just because it also contains Cryptocurrency.

FATCA

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 Cryptocurrency is considered a Specified Foreign Financial Asset can be argued either way. While the name Cryptocurrency 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. Cryptocurrency feasibly could go on forever, while there is only a finite amount of gold.

If the Cryptocurrency is an account, you should probably report it. If the Cryptocurrency 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 Cryptocurrency 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 cryptocurrency and/or 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)

We Specialize in Safely IRS Offshore/Voluntary Disclosure

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  earned 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.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

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

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

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:

Contact Us Today; Let us Help You.