A great deal of attention has been paid to BitCoin by the media, including the financial press. Among the reasons offered for using BitCoin is privacy and anonymity. However, a subtext in the rationale is that because of the anonymity the user can avoid/evade sanctions, and currency export controls, in making funds transfers on a global scale. At first blush the use of a highly encrypted and mysteriously run system has the earmarks of a new method of transacting business. Overstock.com recently stated that it would be accepting BitCoin as payment for orders. BitCoin solves a problem for companies like Overstock. com in that the transaction fee is typically less than 25 basis points compared to 250 basis points charged by credit and debit card merchant processors. But as new as BitCoin seems, it is really quite an old system known to the Department of the Treasury as the “informal value transfer system” or by its street name, the “Hawala”. The Hawala is a terms that describes a system of interconnected money exchanges globally. A representative in the U.S. may have a single relationship in one other country or in many countries. Example: a money exchange in the U.S. may have a correspondent in Asia or in a sanctions country. The exchangers collect funds from a transmitter and then contact their counter-party of receipt of funds. No funds are sent but the counter-party makes deliver from funds on hand to the designated recipient. A “due to-due from” ledger is maintained between the exchangers and at periodic intervals they settle up. The Hawala accomplishes the same purpose as BitCoin without the separate faux currency device, a BitCoin.
The U.S. money exchanger must register as a Money Service Business (MSB) under the Bank Secrecy Act. The failure to register as an MSB is a crime which carries stiff penalties, including fines and incarceration on a variety of charges, including conspiracy and Money Laundering. http://www.justice.gov/usao/nys/pressreleases/January14/SchremFaiellaChargesPR.php “Defendants Sold Bitcoins to be Used to Buy and Sell Illegal Drugs Anonymously on the Silk Road Drug Trafficking Website”. It therefore seems to be the position of the U.S. Attorney’s Office that the BitCoin system is operating as an unregistered MSB. Which leads to the question about whether a U.S. person who has more $10,000 or more in BitCoin has an obligation to file an FBAR. Depending on the specific facts the answer is yes and no.
The question of whether an FBAR would be required by a U.S. person who used the informal value transfer system was address in the Internal Revenue Manual (IRM 4.26.16) in 2008. The following frequently asked questions may be particularly valuable in framing the answer.
FAQ3 “Is an FBAR required to be filed by a money transmitter engaged in Informal Value Transfer System (IVTS)/Hawala transactions? Answer: There would be no FBAR filing requirement if there is no foreign bank or other foreign financial accounts involved. The money transmitter’s relationship with a foreign affiliate, by itself, does not create an FBAR filing requirement. However, if the money transmitter owned a bank account located in a foreign country or had signature authority over someone else’s bank account located in a foreign country, was a United States person, and the account value exceeded $10,000 at any time, the money transmitter would be required to file an FBAR.”
FAQ7 “Do the FBAR filing requirements apply when a money transmitter maintains a bank account with a foreign bank for the purpose of settling money transmission transactions with a foreign bank? Answer: Yes. If a money transmitter owns the account maintained with the foreign bank or has signature or other authority over it, the money transmitter may be required to file an FBAR.”
By substituting the word BitCoin for bank the answer to the question become a bit clearer. A once the transmitter, the BitCoin holder, is more likely than not obligated to file an FBAR if the funds held in a transmitters account originated offshore. If they originated in a sanction country (such as Iran, Syria, etc.,) then licenses under the Office of Foreign Asset Control may be required prior to receipt of funds.
As in all new technology, the device is just a tool to accomplish a private transaction. Whether the tool should come with an instruction manual or a warning label remains to be seen. But for those U.S. taxpayers looking to use BitCoin for purposes of avoiding the FBAR rules, be aware, that your conduct is likely to be considered willful and you may be subject to huge penalties and incarceration. This is not the way to transfer funds from one hidden account to another. The best approach is to come forward through a voluntary disclosure while the opportunity remains.
There may be a pot of gold under the rainbow, but it is not likely to contain BitCoins.