The confusing state of tax policy on Bitcoin

To file or not to file an FBAR report, that may be a question taxpayers with Bitcoin exchange accounts are asking themselves right now.

This may be a particularly pertinent question for D.C.-area readers to be posing for two reasons. First, the deadline for filing what is now called the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR) is coming up on June 30. Second, even Internal Revenue Service officials don't seem to be sure what the policy is. 

One reason things are so unclear, according to some analysts, is that the technology of virtual currencies is so new and developing so fast that regulators are playing catch-up. Whether that is good or bad is neither here nor there. But it does create uncertainty for many and the possibility of controversy over tax filing compliance. In such circumstances it is always best to contact an attorney.

What seems to be at the heart of governmental puzzlement is the difference between virtual currency held privately in electronic "wallets" and currency held in third-party exchange accounts.

The former might not need to be reported, but because the exchanges can be used to convert the electronic currencies into common currencies and may offer services like banks, analysts say regulators expect FBAR filing rules to apply. That would mean that any currency valued at $10,000 or more and held by an individual in a Bitcoin exchange account might be viewed as subject to reporting.

In the face of all this confusion and considering that the penalties for not filing an FBAR can be stiff, it seems that the answer many analysts would give to the question originally posed would be to file, because it's better to be safe than sorry.

Source: Bloomberg BNA, "Bitcoin Exchange Accounts Should Be Reported on FBARs, Analysts Say," Lydia Beyoud, June 6, 2014

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