US Tax Considerations- Cryptocurrencies Held in Foreign Exchanges

In the prior articles I have written on US Tax considerations, we learned how to value the US Dollar income received from STEEM and Steem Based Dollars (https://steemit.com/tax/@lpfaust/us-tax-considerations-when-blogging-for-magic-internet-money-part-i) and we learned how to calculate the capital gain (or loss) from exchanging STEEM and Steem Based Dollars for US Dollars (https://steemit.com/tax/@lpfaust/us-tax-considerations-when-blogging-for-magic-internet-money-part-ii).

Before moving forward with the next installment, we need to examine where your crypto is being exchanged and held. US Citizens, Resident Aliens, US Citizen Expats and Resident Aliens living abroad could be subject to reporting requirements for both the IRS (Internal Revenue Service) and FinCEN (Financial Crimes Enforcement Network).

Let’s take a closer look at the general rules of compliance…

But First, The Required Legalese…

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

A General Overview of FBAR and FATCA Reporting

Capital One has an advertising campaign built around the slogan, “what’s in your wallet?” When considering the US Tax Considerations of cryptocurrency trading, I think a great slogan to consider is, “”where is your wallet?”

Crypto exchanges have sprung up worldwide providing crypto traders of all stripes, from the pro trader looking to make a living on foreign exchange and crypto to the novice who may have a passing interest or been paid in crypto, the ability to exchange crypto for different fiat currencies at different rates in exchanges based in different countries subject to different laws and jurisdictions. That’s a mouthful. For instance, three exchanges not on US soil which would trigger an FBAR filing (provided account balance and reporting thresholds are met) include, Kraken, BTC-E and Bitfinex.

Rather than taking a deep dive into all of this, the question becomes, who falls under this reporting requirement, what are my general reporting requirements for US Tax law and what are the penalties for non-filing?

Who must file an FBAR?

United States persons are required to file an FBAR if:

1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported. Regarding non-monetary assets (e.g., securities), the instructions indicate that their value should be determined based on the fair market value of such assets at the end of the calendar year. If the assets were withdrawn from the account during the year, then their value is based on the fair market value at the time of the withdrawal.
3. Finally, as a default rule, the instructions state that if a person had a financial interest in less than twenty five accounts and cannot determine whether the “maximum value” of these accounts surpasses the $10,000 threshold, then the person must provide all the information for each of the accounts. In other words, the person is forced to error on the side of over-inclusion.

United States person includes U.S. citizens; U.S. residents; US Territory resident aliens; entities, US Territory entities; including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

What are the general FBAR Reporting Requirements?

The FBAR refers to Form 114 (http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html) which must be filed with FinCEN by June 30th of each calendar year. The FBAR is not filed with a federal tax return. When the IRS grants a filing extension for a taxpayer’s income tax return, it does not extend the time to file an FBAR. There is no provision for requesting an extension of time to file an FBAR.

What are the penalties for failing to file an FBAR?

Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.

Who falls under the purview of FATCA?
U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets

What are the General FATCA Reporting Requirements?

Tax filers must include a Form 8938 to report those foreign assets. In general, if the total value of the foreign assets is at or below $50,000 or the taxpayer does not have to file a tax return for the year, then the taxpayer would not have to file a Form 8938.

What are the penalties for failing to file Form 8938?

Failure to file Form 8938 by the due date can subject the taxpayer to a $10,000 penalty. If the taxpayer continues to fail to file a correct and complete Form 8938 within 90 days after receiving a notice from the IRS about the failure to file, the taxpayer can be subject to additional penalties of $10,000 for each 30 day period the failure to file is not remedied, for a max additional penalty of $50,000.

If the taxpayer underpays income tax due as a result of a transaction involving an undisclosed specified foreign financial asset, you may have to pay a penalty equal to 40 percent of that underpayment and be subject to criminal penalties.

If the taxpayer underpays tax due to fraud, you must pay a penalty of 75 percent of the underpayment due to fraud and be subject to criminal penalties.

Wrapping it Up

The long and short of it is, if you have traded on exchanges in foreign countries and a fall under the jurisdiction of US Tax Law, be absolutely certain to file these forms accurately and timely or it could create some very serious problems moving forward.

Have a tax question? Please feel free leave a question in the comment section below and I may feature it in a future blog post.