Published: January 12th, 2021
The U.S. Treasury has changed its approach towards virtual currencies, with the Financial Crimes Enforcement Network (FinCEN) announcing that it intends to amend the rules and make FBAR disclosures mandatory for cryptocurrencies.
Over the last decade, the Treasury held that cryptocurrency holders do not have to report their virtual currency holdings to the Financial Crimes Enforcement Network's (FinCEN) Form 114, formerly, the Report of Foreign Bank and Financial Accounts (FBAR).
This precedence seems to be changing. FinCEN has announced its intentions to amend the law to compel virtual currency holders to make FBAR disclosures for cryptocurrencies such as Bitcoin.
Currently, U.S. nationals are required to file Form 114 only if they hold financial interests in or are signatories of at least one financial account domiciled outside the U.S. The aggregate value of the said foreign financial account should have been more than $10,000 at some point during the calendar year in question. The reporting obligation stands even where taxable income is not involved.
Failing to file the FBAR often attracts some very hefty penalties, which might be up to $10,000 per violation for unintentional violations. Individuals who fail to file willfully risk paying up to $100,000 or half of the unreported account balance.
Considering the vast scope of a financial account in the eyes of FinCEN, the law as currently constituted is a blanket. A financial account, at least according to the requirements of FBAR, refer to any bank account, whether savings or demand, checking or deposit, time deposit, or any other account held with a financial institution or any entity that provides financial services located outside the U.S.
The Internal Revenue Services (IRS) issued its initial guidance about cryptocurrencies in 2014. Back then, the agency was wrapping its head around the idea of virtual currencies. For federal income tax purposes, the agency instructed that digital currencies such as Bitcoin should not be treated as currency capable of generating foreign currency gain or loss.
In the statement, the IRS said that Bitcoin and other similar virtual currencies could not be placed in the same class with capital assets. However, after several years of making requisite policy and getting acquainted with the cryptocurrency sphere, the concerned agencies are ready to refine their approach.
Just before the end of last year, FinCEN published a notice which read in part that FBAR regulations do not consider foreign accounts containing virtual currencies to fall under reportable accounts. However, FinCEN intends to introduce amendments to the rules that implement the Banks Secrecy Act (BSA), the statement added.
The note emphasized that the amendments will include virtual currencies as reportable under article 31 CFR 1010.350 of the regulation. According to Kelly Phillips, a tax expert, and contributor for Forbes, the proposed amendment mean that the IRS is growing more serious about cryptocurrencies. She added that the agency has moved to include a question about cryptocurrency use on Form 1040.
However, neither the Treasury nor FinCEN has commented further on the proposed amendment or indicated when the proposal would take effect. But since the FBAR is an annual report that often is due on the same date as the tax returns, normally on April 15, experts think the IRS is looking forward to a busy year. The agency's work might include form changes to factor the CARES Act and the spending/stimulus/extenders bill that was recently passed.
Kelly is convinced the IRS or FinCEN will introduce a change that retroactively goes into effect for the tax year 2020. Should the agencies undertake such an action, the said tax obligations borne of the action will be reportable in 2021.
The proposed regulation wants Americans to report if they hold more than $10,000 in cryptocurrencies held with foreign financial or virtual currency service providers such as exchanges.
The proposed amendment is among the many dramatic changes that various Treasury Department's agencies have attempted to initiate just weeks before the expected change of guard. It will be interesting to see how the changes unfold after president-elect Biden replaces these agencies' current leadership.
Aside from the date that the regulation might take effect, another critical aspect that remains a mystery is the additional information that crypto holders might be expected to file. Danny Nelson and Nikhilesh De, staffers at CoinDesk, said such information might include users' Blockchain addresses.
The FinCEN notice came just days before the public comment period for another of the agency's initiatives comes to a close. FinCEN last December proposed a long-dreaded plan that requires cryptocurrency exchanges to identify personal wallets.
The said initiative would require all exchanges to store customer information whenever they transfer US$3,000 or more in crypto to private wallets. The proposed regulations would also require exchanges to file Currency Transaction Reports (CTR) for transfers aggregating more than US$10,000 in cryptocurrencies per day.
The notice for the public comments period for the initiative, which was made just a week before Christmas, has attracted the crypto community's anger for its potential effects on various cryptocurrency projects. Cryptocurrency enthusiasts also worry that the proposal had a shorter than usual comment period, especially since it coincided with the U.S. federal holidays.
If both proposals are implemented, U.S. nationals might have to report cryptocurrency transactions and holdings exceeding US$10,000 regardless of where such funds are held.
If the proposals are modeled around the current FBAR regulations, crypto holders might have to give a lot more information than they are comfortable doing. According to the IRS website, FBAR filing includes, among other things, the name of the account, its name, the name, and address of the financial service provider, the type of account, and the maximum value in the account during the reporting year.
In what appears to be the U.S. authorities' attempt to tighten the bolts around crypto tax, FinCEN has announced plans to amend its regulations to make crypto reportable on FBAR. The proposal now means that U.S. nationals with more than $10,000 in crypto held in accounts domiciled outside the country might have to report such wealth.