FinCEN recently took another important step toward bringing virtual currency into the financial assets reporting scheme.
Taxpayers that have $10,000 or more in a foreign bank account have long been required to file a foreign bank account report (or “FBAR”) on FinCEN Form 114. The penalties for failing to report foreign bank accounts are significant: $10,000 for a non-willful failure and the greater of $100,000 and up to 50 percent of the unreported account balance for willful failures. While the rules requiring the reporting are issued under the authority of the Bank Secrecy Act, the IRS administers the rules—and the IRS has been aggressive in assessing penalties for failures to report such holdings.
The application of the filing requirement to cryptocurrency has been the subject of some uncertainty. The uncertainty arises because the reporting requirement only applies to a “financial account.” A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account (per 31 CFR 1010.350(c)) also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions). The regulations reserve “other investment fund,” presumably for a definition to come. However, in response to questions raised by the AICPA Virtual Currency Task Force in 2019, FinCEN stated that virtual currency was not subject to FBAR reporting. This was confirmed by FinCEN in 2020 as well.
Whether or not cryptocurrencies are subject to FBAR filing, such holdings may have to be included on the IRS’s Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is the counterpart to FinCEN 114.
Recent FinCEN Proposed Rule
On December 31, 2020, FinCEN issued Notice 2020-2 that announced a proposed rule that would amend the regulations implementing the Bank Secrecy Act regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350. The proposed rule does not specify an effective date.
The decision to treat cryptocurrency as subject to FBAR reporting significantly increases the potential penalties against those who fail to properly identify these accounts. Holders of virtual currency in foreign accounts should review this rule and prepare to report such holdings once the rule becomes effective.