BY CRYSTAL STRANGER, CO-FOUNDER, PEACOUNTS
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.govand 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.)
Contact info section on the FinCEN form 114/ US Department of Treasury
- Most crypto accounts will fall under the individually owned accounts, which is the first part.