- 1 FinCEN Notice Proposes New FBAR Cryptocurrency Reporting
- 2 FinCEN Proposes Regulations
- 3 FinCEN Notice 2020-2
- 4 Offshore Disclosure & Amnesty for Cryptocurrency
- 5 Tax Amnesty/Voluntary Disclosure for Crypto
- 6 Voluntary Disclosure Program (VDP) – Domestic or Offshore
- 7 Reasonable Cause – Domestic or Offshore
- 8 Streamlined Domestic and Streamlined Foreign – Offshore and Domestic
- 9 DIIRSP – Offshore and Domestic
- 10 You Can Still Safely Get Crypto Tax Compliant
- 11 Golding & Golding: About Our International Tax Law Firm
FinCEN Notice Proposes New FBAR Cryptocurrency Reporting
FinCEN Notice Proposes FBAR Cryptocurrency Reporting: For many years, our international tax lawyers have authored a variety of different FBAR articles, and counseled many taxpayers worldwide on FBAR issues involving offshore cryptocurrency. Dating back 10+years ago to when cryptocurrency became an online phenomenon, we have always taken the position in our prior articles that sooner or later the US government would require taxpayers to report virtual currency similar to fiat currency. It is important to note that the US government does not treat cryptocurrency as currency but rather as property.
FinCEN Proposes Regulations
A few weeks back, FinCEN proposed regulations that would require much more extensive reporting for certain cryptocurrency transactions. These new proposed regulations mimic the regulations required for fiat currency. And now this week, FinCEN released Notice 2020-2, which supports the reporting of cryptocurrency and other virtual currency on the FBAR.
FinCEN Notice 2020-2
As provided specifically in FinCEN Notice 2020-2:
“Report of Foreign Bank and Financial Accounts (FBAR) Filing Requirement for Virtual Currency FinCEN Notice 2020-2 Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)).
For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency).
However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.”
Offshore Disclosure & Amnesty for Cryptocurrency
One common question is whether or not there will ever be a standalone cryptocurrency tax amnesty program —
Whether or not there is a cryptocurrency tax amnesty standalone program in the works, at the current time any of the voluntary disclosure programs now available would be applicable to individuals, estates, trusts and businesses in order to get into compliance for undisclosed or incorrectly reported cryptocurrency transactions.
*We refer to cryptocurrency sometimes as Bitcoin, because many people still refer to cryptocurrency in general as Bitcoin.
Tax Amnesty/Voluntary Disclosure for Crypto
With the US government essentially taking the position that 1031 exchanges are not proper for cryptocurrency — and based on each individual taxpayer’s risk tolerance level — there are many US cryptocurrency owners who may be out of compliance for one or more years of crypto reporting.
In order to get into compliance there are a few different options:
Voluntary Disclosure Program (VDP) – Domestic or Offshore
There is some confusion about the acronym VDP.
VDP or the voluntary disclosure program has been on the books for many years. Between 2009 and 2018, there was an offshoot of the program referred to as OVDP (Offshore Voluntary Disclosure Program).
That program was closed in 2018, and traditional VDP was expanded to include a formalized submission preclearance letter. And, question three of the new mandatory voluntary disclosure practice pre-clearance request and application form has a specific disclosure box identified for “virtual currency issues.”
While the IRS may create a standalone program — you never know, right — the form 14457 was recently updated to include virtual currency. Therefore, VDP can be used to report cryptocurrency.
But, please keep in mind that under the terms of the new updated version of the program — since late 2018 and early 2019 — VDP is primarily for people who are willful, and the penalties are steep.
If you are non-willful, chances are this is not the right program for you and continue down the list —
Reasonable Cause – Domestic or Offshore
Reasonable cause is not a program, but rather a defense to penalties. Stated another way, if a person can show that they acted with reasonable cause and not with willful neglect, then the IRS is not able to sustain penalties for the noncompliance.
There is no reasonable cause form similar to the 14457 form indicated above. And, there is no bright-line test for reasonable cause. It is generally based on the totality of the circumstance.
There are many resources available to assess reasonable cause, but at the end of the day a reasonable cause submission is a detailed and comprehensive undertaking.
Streamlined Domestic and Streamlined Foreign – Offshore and Domestic
If a person has overseas or foreign cryptocurrency — or the taxpayer has other unreported foreign accounts, assets, investments, or income and US or foreign cryptocurrency — and is non-willful — then the streamlined disclosure procedures might be the Taxpayer’s best option.
In order to qualify for the streamlined program, there has to be a noncompliance issue with something related overseas — and the person must be non-willful. It can get confusing, but the the terms streamlined domestic and streamlined foreign do not deal directly with the location of the assets, but rather whether the applicant is a US resident (streamline domestic) or foreign resident (streamlined foreign).
If a person qualifies for these programs, then the entire penalty they may be significantly reduced — and sometimes may even be completely abated — at least as to the title 26 miscellaneous offshore penalty aspect of this submission.
DIIRSP – Offshore and Domestic
Up until November 2020, there was an offshoot of the Streamlined Program referred to as the Delinquent International Information Return Submission Procedures. It operated somewhat similar to the streamlined program, but was primarily for taxpayers who had no unreported income and did not require any substantive modification to the tax portion of their tax return.
The program was modified in late November 2020, and is now nearly identical to a reasonable cause submission.
You Can Still Safely Get Crypto Tax Compliant
In conclusion, the US government is strictly enforcing cryptocurrency tax related matters.
It is important for taxpayers to stay in compliance with cryptocurrency related transactions. If they are not in compliance already, then they should consider entering into one of the tax amnesty/voluntary disclosure programs to avoid much larger fines and penalties in the future.
These programs are highly complicated, and unfortunately there are a lot of shyster attorneys and inexperienced counsel making false representations to unsuspecting taxpayers about how the process works, billing, fees and attorney-client privilege.
If you are considering making a VDP or reasonable cause submission to seek a penalty waiver, you should reach out to a Board-Certified tax attorney specialist to assist you with these type of complex submission.
We have several articles and videos available to assist you in understanding how the process works.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in U.S. & international tax, and specifically IRS disclosure & compliance for assets including cryptocurrency.
Contact our firm today for assistance with getting compliant.