Are Virtual Currencies Held in Foreign Exchanges FBAR Reportable?
As we’ve previously reported, in Notice 2014-21,1the IRS considers virtual currency to be property rather than fiat money. The Notice, however, is silent as to whether virtual currency is reportable on Form 114, Report of Foreign Bank and Financial Accounts(FBAR). For purposes of the FBAR, all foreign financial accounts must be reported when a taxpayer’s financial assets in those accounts exceed $10,000-but foreign property is not reported on the FBAR. The unique nature of cryptocurrency and its frequent trading on foreign virtual “centralized exchanges,” have left many taxpayers and professionals wondering if and/or when virtual currency should be reported on the FBAR.
Significantly, individuals trading cryptocurrency in foreign virtual “centralized exchanges” are particularly uncertain regarding reporting requirements. Foreign virtual exchanges maintain custody of their customers’ currencies-similar to Foreign Financial Institutions (FFIs). Foreign virtual exchanges may function only as virtual exchanges (i.e., platforms for buyers and sellers of different virtual currencies), but they may also function to exchange virtual currency into fiat money. Typically, the value of fiat money exceeding $10,000 held by FFIs must be reported on the FBAR.
In June of 2019, Kirk Phillips, a member of the AICPA Virtual Currency Task Force, reported that the Task Force reached out to FinCEN and asked whether virtual currency held in a foreign exchange should be reported on the FBAR. Phillips reported that:
FinCEN responded that regulations (31 C.F.R. §1010.350(c)) donotdefine virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. This may change in the future, especially considering the influx of stable coins, so practitioners should stay abreast on this topic. FinCEN did tell the task force that it, “in consultation with the IRS, continue[s] to evaluate the value of incorporating virtual currency held offshore into the FBAR regulatory reporting requirements.” Absent this clarity, the conservative approach would be filing the FBAR.2
The implication in this statement – that filing may be required in the future – should encourage taxpayers to take the conservative approach and file the FBAR. If the law changes, taxpayers could face steep penalties for non-compliance.
More certainly, a taxpayer with both U.S. dollars and virtual currency on a foreign third-party exchange should consider the U.S. dollar amount for filing purposes.
Finally, for purposes of the Foreign Account Tax Compliance Act (FATCA), taxpayers having foreign financial assets valued at $50,000 or more are still required to report foreign virtual exchange holdings on the Form 8938, Statement of Specified Foreign Financial Assets.
If you have questions or concerns regarding virtual currency and FBAR reporting, call Frost Law today at 410-497-5947.
12014-16 I.R.B. 938.
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