Taxpayers Don’t Have to Report Virtual Currency on FBARs – Yet

by: Smith and Howard

July 24, 2014

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Bitcoin and other virtual currency are proving to have greater lasting power than many predicted when they first attracted broad public attention. They’re even beginning to attract the attention of taxing authorities.

Recently, in fact, an IRS official stated during a webinar that taxpayers aren’t required to report Bitcoins on their Report of Foreign Bank and Financial Accounts (FBAR). However, the official, Rod Lundquist, Senior Program Analyst in the IRS’s Small Business / Self Employed division, cautioned that the IRS is continuing to analyze virtual currency and that this policy could very well change going forward.

Virtual currency defined

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. It can sometimes operate like “real” currency ─ that is, the coins and paper money of a country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance. But virtual currency has no legal tender status in any jurisdiction. If it has an equivalent value in, or acts as a substitute for, real currency, it’s referred to as “convertible” virtual currency.

Bitcoin is a convertible virtual currency that can be digitally traded between users and purchased for, or exchanged into, real or other virtual currencies. Although Bitcoin and other virtual currency are widely known for use in making illegal black market purchases, an increasing number of mainstream businesses have begun to accept Bitcoins as payment, such as online retailer

Back in March, the IRS issued long-awaited guidance on the tax treatment of virtual currency. In general, the guidance provided that virtual currency is treated as property for U.S. federal tax purposes, and the general tax principles that apply to property transactions apply to transactions using virtual currency.

Recap of FBAR requirements

U.S. citizens and residents of the United States, and entities organized in the United States, including but not limited to corporations, partnerships, limited liability companies, and trusts, are subject to rules governing FBAR. If they have an interest in, or signature authority over, a financial account, they’re required to disclose the existence of such account on Schedule B, Part III of their individual income tax return. Additionally, U.S. citizens must file an FBAR with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signatory or other authority.

Many U.S. multinational corporations and their employees may have FBAR filing requirements. In addition to individuals who own foreign financial accounts, some common examples of who must file FBARs include:

  • U.S. corporations, partnerships and S corporations who own foreign financial accounts,
  • Corporate employees, particularly those in the treasury function, who have signatory authority over foreign financial accounts,

  • A U.S. parent of a foreign subsidiary, if the foreign subsidiary has a financial interest in a foreign financial account,

  • The controlling shareholder of a U.S. corporation that owns a foreign subsidiary, if the foreign subsidiary has a financial interest in a foreign financial account and the controlling shareholder is a U.S. resident, and

  • U.S. partners in a partnership that is a controlling partner or shareholder of a U.S. partnership or corporation that owns a foreign subsidiary, if the foreign subsidiary has a financial interest in a foreign financial account. For these purposes, chain of ownership may be taken into account, creating a filing requirement for the ultimate owners in “tiered” structures.

Those who willfully fail to file their FBARs on a timely basis (that is, on or before June 30 of the following year) can be assessed a penalty of up to the greater of $100,000 or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR.

What’s next?

The issue of whether Bitcoins are subject to FBAR reporting has been widely debated among the financial and tax community. One view is that, unless taxpayers can prove that their Bitcoins are within the United States, their owners would be required to file an FBAR if their holdings exceeded $10,000. However, others question whether a Bitcoin account is truly a financial account with a financial institution for purposes of the FBAR rules. Despite the IRS official’s recent pronouncement, these questions are still unanswered.

Many speculate that the Financial Crimes Enforcement Network (FinCEN) and the IRS will have to formally address the issue sooner rather than later, although there is no current indication when such guidance may come. Stay tuned for further details.

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