Both the American Bar Association (ABA) and the American Institute of Certified Public Accountants (AICPA) have written letters (3/19/18 for the ABA and 5/30/18 for the AICPA) to the IRS to obtain further definition and clarity on foreign reporting requirements for Cryptocurrency.
Is Cryptocurrency subject to Foreign Bank Account Reports (FBARs) and Statement of Specified Foreign Financial Assets (Form 8938) reporting?
The IRS Notice 2014-21 states that Cryptocurrency is treated as property versus fiat currency. Notice 2014-21 does not address a requirement for FBAR and Form 8938 reporting. As a result, IRS has received requests for immediate guidance regarding the tax treatment of Cryptocurrency, including foreign reporting requirements.
A lack of clarity regarding Cryptocurrency FBAR and Form 8938 reporting requirements stems from the fact that Cryptocurrency can be traded on “centralized exchanges” in non-US jurisdictions. Foreign virtual Cryptocurrency exchanges can operate as virtual exchanges only or as exchanges with the ability to exchange Cryptocurrency into fiat currency; consequently categorizing the exchanges as Foreign Financial Institutions (FFIs). Since the exchanges could be “viewed” as FFIs, then a US Taxpayer could potentially have FBAR and Form 8938 reporting requirements.
The exchanges may be a pure virtual currency exchange or one which allows virtual currencies to exchange into fiat currencies. Foreign virtual currency exchanges have custody of customers’ virtual currencies and an exchange failure results in the loss of customer funds which are similar to a Foreign Financial Institution (FFI) because they behave in the same manner. Since Notice 2014-21 does not address tax foreign reporting requirements for Cryptocurrency, the ABA and the AICPA have stepped up to ask the IRS for clarity on FBAR and Form 8938 status.
Do the US Taxpayers that buy, hold or sell Cryptocurrency via foreign exchanges need to go through additional reporting requirements?
The answer in NOT clear. But here is what we know: US Taxpayers with more than $10,000 in the aggregate in FFIs are required to fill out the FBAR and FATCA requires US Taxpayers that meet certain thresholds to report foreign assets on Form 8938.
The AICPA’s Suggested “Frequently Asked Questions (FAQ’s)” cover 12 areas of Cryptocurrency; one of them being foreign reporting as noted here:
Don’t be a victim of your own making
US Taxpayers utilizing foreign exchanges could face foreign reporting requirements when they convert their Cryptocurrency into fiat currency or if they transfer the Cryptocurrency from wallet to exchange. The tax treatment of Cryptocurrency remains a gray area with minimal IRS guidance. The AICPA is recommending positions to the IRS on the reporting and tax treatment of various situations so that taxpayers and tax practitioners have clarity. Taxpayers holding Cryptocurrency ought to consult their specialized tax representative to analyze potential reporting requirements and the proper application of tax laws covering Cryptocurrency.