Are FBAR Filings Required for Virtual Currency?

As we’ve discussed, IRS Notice 2014-21 clarified how virtual currency (or “cryptocurrency”) is classified for tax purposes. It didn’t, however, answer every tax-related question about virtual currency. In fact, there are still plenty of issues to work out. One such issue pertains to foreign cryptocurrency FBAR filing requirements.

A Recognized Medium of Exchange?

Virtual currency is still questionable as a medium of exchange. But, as we’ve also written, the IRS is showing a willingness to recognize tax liabilities on virtual currency gains. Does this, then, mean that we’re closer to having it declare that such currency can be used as legal tender? After all, the government recognizes this currency as “property” for tax purposes.

FinCEN Opines on Cryptocurrency FBARs

In any case, one other area which has been clarified regarding virtual currency is its status for FBAR reporting purposes. FinCEN recently (in June, 2019) held that such cryptocurrency FBAR reporting is not required in order to comply with FBAR rules.

In this post, we will go over this recent determination by FinCEN and discuss the significance of this determination. We will first briefly reiterate the basics of FBAR reporting and then discuss the reasoning behind FinCEN’s determination.

FBAR Reporting: Offshore Accounts of $10,000+

Taxpayers with an offshore account of $10,000 or more at any time during the year, must file Form 114. Form 114 is the Report of Foreign Bank and Financial Accounts (or FBAR). To be more precise, taxpayers require Form 114 whenever the aggregate value of all offshore accounts exceeds $10,000. This means that taxpayers with multiple offshore accounts, each with less than $10,000, is required to file the FBAR.

Tax professionals have wondered whether virtual currency held in accounts associated with foreign commercial exchanges are includible in the FBAR calculation. Recently, FinCEN gave a response to this issue and related in the Journal of Accountancy. The response will come as good news to many. But this good news could easily change in the near future. Accordingly, taxpayers and tax professionals alike need to check back on cryptocurrency FBAR filing requirements down the road.

Virtual Currency Held in Offshore Account is Not FBAR Reportable

Virtual currencies are held in virtual accounts, called “digital wallets.” These digital wallets are supposedly more secure than ordinary bank accounts. They have passwords, and can send and receive virtual currency directly from the wallet, very similar to standard bank accounts. U.S. taxpayers sometimes use foreign commercial exchanges to buy and sell virtual currency. They can also hold virtual currency with these foreign exchanges. This is the type of scenario in which FBAR reporting may be necessary. According to the AICPA Virtual Currency Task Force, however, FinCEN has responded that offshore virtual currency accounts are not reportable for FBAR purposes. That’s because FinCEN currently believes that virtual currency accounts don’t fall within the purview of the applicable regulations (i.e., 31 C.F.R. §1010.350(c)). Accordingly, it doesn’t recognize a taxpayer reporting requirement.

FinCEN Policy Can Change

Nonetheless, taxpayers should keep in mind that this situation may change in the near future. FinCEN states that it will continue to consider the merits of foreign cryptocurrency FBAR requirements. To be on the safe side, therefore, holders of foreign virtual currency accounts should file an FBAR. There is no technical requirement to do so. Following this practice, though, may help should FinCEN change its policy in the future.

Follow Us for Cryptocurrency FBAR Updates

Even though there are still lots of unanswered questions pertaining to virtual currency, we at Mackay, Caswell & Callahan, P.C., think that cryptocurrency is here to stay. We’ll continue to feature cutting-edge articles on virtual currency taxation. We expect to see many clients in the future who have questions about how to deal with gains resulting from virtual currency. If you have tax debt stemming from virtual currency gains, we can help. This type of tax debt may be uncommon, but we know how to handle the situation. Our attorneys are familiar with virtual currency and will be able to converse with you on a three-dimensional level. If you’d like further information, contact one of our top New York City tax attorneys today.

View Attorney Profile

Joseph M. Callahan

Licensed since 1986

Member at firm Mackay, Caswell & Callahan, P.C.

AWARDS

BV Distinguished

RECENT POSTS

  • Wayfair and NY Sales Tax
    Posted on October 23, 2019
    Topic: Taxation

    In the past, we’ve documented some of the complexity surrounding sales tax compliance here in New York State. As we’ve discussed, compliance with the sales and use tax in New York isn’t easy, as businesses have to account for a veritable minefield of rules and regulations. In view of the now well-known United States Supreme ... Read more

  • PLR 9232030 & Sec. 1031 Exchanges
    Posted on October 21, 2019
    Topic: Taxation

    One of the most fascinating things about Section 1031 tax law is that relatively few cases have been resolved in court. Most of the opinions shaping the mechanics of Section 1031 exchanges, including PLR 9232030, come from non-authoritative sources, such as Revenue Procedures and Private Letter Rulings directly from the IRS. Documents from the IRS ... Read more

  • What You Should Know About FATCA Compliance
    Posted on October 16, 2019
    Topic: Taxation

    Back in 2010, former President Barack Obama signed into law the HIRE Act in an effort to accelerate recovery from the 2008 financial crisis. The HIRE act – short for Hiring Incentives to Restore Employment – endorsed the Foreign Account Tax Compliance Act (FATCA) at the time it was passed. FATCA is a highly significant ... Read more

Joseph M. Callahan

Licensed since 1986

Member at firm Mackay, Caswell & Callahan, P.C.

AWARDS

BV Distinguished

RECENT POSTS

  • Wayfair and NY Sales Tax
    Posted on October 23, 2019
    Topic: Taxation

    In the past, we’ve documented some of the complexity surrounding sales tax compliance here in New York State. As we’ve discussed, compliance with the sales and use tax in New York isn’t easy, as businesses have to account for a veritable minefield of rules and regulations. In view of the now well-known United States Supreme ... Read more

  • PLR 9232030 & Sec. 1031 Exchanges
    Posted on October 21, 2019
    Topic: Taxation

    One of the most fascinating things about Section 1031 tax law is that relatively few cases have been resolved in court. Most of the opinions shaping the mechanics of Section 1031 exchanges, including PLR 9232030, come from non-authoritative sources, such as Revenue Procedures and Private Letter Rulings directly from the IRS. Documents from the IRS ... Read more

  • What You Should Know About FATCA Compliance
    Posted on October 16, 2019
    Topic: Taxation

    Back in 2010, former President Barack Obama signed into law the HIRE Act in an effort to accelerate recovery from the 2008 financial crisis. The HIRE act – short for Hiring Incentives to Restore Employment – endorsed the Foreign Account Tax Compliance Act (FATCA) at the time it was passed. FATCA is a highly significant ... Read more