Foreign Banking Rules and Crypto Investments: What You Need to Know

Virtual currencies are experiencing a rebranding moment. In recent years, cryptocurrency enjoyed notoriety as a shady tool for money launderers and drug dealers, and the IRS reported that only roughly 800 US citizens had reported crypto transactions on their taxes in 2015. But thanks to media coverage, the tide is shifting towards mainstream financial markets, and anyone handling crypto needs to understand the applicable tax and banking rules, before the IRS comes to get you.

Typically failing to report virtual currency holdings is simply an oversight, as most U.S. cryptocurrency investors do not know they may be breaking the law when not reporting these accounts. But not properly reporting your non-US bank accounts can easily carry combined penalties of $20,000 per year, and even criminal charges. Luckily though, complying with these rules is not as scary or difficult as people think. And there is no tax assessed on these funds, it is only a reporting requirement. You are only taxed on the gains when tokens are sold, or earnings if received, not for holding them.

There has been some conflicting information in the media about how to properly treat crypto accounts, and some practitioners assert that Bitcoin holdings do not need to be reported on FBAR and other FATCA forms. However, it is not that simple, as many taxpayers hold funds for trading in exchanges that operate in foreign countries, and those accounts could clearly be considered foreign financial accounts.

Additionally, even directly holding tokens can be confusing as where the actual wallets exist in the world can be difficult to determine. This issue has yet to be tried in tax court, and until this happens, there will be no way to know what the law is. Thus it seems the safest position is to report all cryptocurrency accounts, especially as there are no tax consequences and little cost involved in doing so, and this way you are bulletproof against draconian fines.

Report of Foreign Bank and Financial Accounts (FBAR)

The simplest type of cryptocurrency informational return is the FBAR report, also known as FinCEN form 114. You are required to file this annually if you have a total combined balance in your non-US bank accounts of over $10,000 at any point during the tax year. This is electronically filed with the Treasury Department and is a relatively simple form. You can download from FinCEN at https://bsaefiling.fincen.treas.gov and file online for free. The FBAR report is due each year before October 15th to report amounts for the year prior.

A Guide to Filling Out FinCEN form 114.

• On the form, simply report your basic information (name, address, account numbers, etc.)

• Most crypto accounts will fall under the individually owned accounts, which is the first part.

• For each account, you provide the highest value in the year, type of account, account number and address of bank.

• You can always write “none” if you do not have an account number or bank address. (Be sure not to put your key for accessing your funds in a wallet here!)

• For the highest value to list you can always estimate if you do not know the exact value; there is no harm in over-reporting.

• There is a box to check for “account value not known”, but this should only be used if a good estimate cannot be determined.

• If you have other accounts in fiat currencies outside the US, the exchange rate to use is the US Treasury’s Year-End Rate.

• Keep in mind that if your financial situation is complex, or you need to file for past years, you will want to retain expert help with filing this.

Form 8938

A bit more complex than the FBAR, form 8938 must be filed with your Federal Tax Return. This is only required if your balances are above the following thresholds:

Filing Status:

• Bank Balance At Year-End
• Highest Bank Balance in Year

1. Single or MFS- US Resident

• $50,000
• $75,000

2. Married Filing Joint- US Resident

• $100,000
• $150,000

3. Single or MFS- Living Abroad

• $200,000
• $300,000

4. Married Filing Joint- Living Abroad

• $400,000
• $600,000

*MFS refers to a married couple that file separate returns.

This form requires more information, and can be a little tougher to complete. So if you fall into this filing requirement, it’s best to retain a qualified tax professional who is familiar with filing this form. Especially important is that if you have any gains from cryptocurrency that these gains reported on Sch D will show on part III of 8938.

Amnesty Programs

If you have not filed these forms in past years you may be able to qualify for one of the IRS amnesty programs for delinquent filers. For most of these programs, the error of non-filing must have been non-willful, which basically means you were not aware of the requirements. If you did know of the requirements but still did not file, you may wish to file the Offshore Voluntary Disclosure Program (OVDP) which may relieve you of criminal liability, however, you should retain a tax attorney to complete this if that applies.

The simplest of the non-willful programs is the Delinquent FBAR Submissions Procedures. To apply for this you simply need to insert language applying to this program in the ‘late explanation’ box of the FBAR. Relatively simple and effective for most taxpayers, this will waive all FBAR penalties. To apply for this you need to file FBAR reports for all years you had accounts, up to a maximum of six years back.

The third option is the Streamlined Procedures. For U.S. residents this is not as good as the Delinquent FBAR Submission Procedures, as a 5% penalty is assessed on the highest year of bank accounts reported. However, if you failed to report earnings on crypto trading for a number of years, this program can still be beneficial as it will waive penalties related to the additional income you are reporting, and stop the statute of limitations at the three years filed within the amnesty program.

Voluntarily disclosing this kind of information is always smarter than waiting to see if you get caught. The double-edged sword of the blockchain is it provides anonymity, until the wallet code is known, then after that all transactions can be tracked because the hash-based proof-of-work forms a record that cannot be changed.

Meaning, once the IRS finds your account, it is simple for them to see all transactions ever made. The bottom line: Report your crypto balances now to avoid a ton of trouble and fines down the line.

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