The US Treasury Department is once again sharpening its sword on crypto. In January 2021, the Treasury Department’s Financial Crimes Enforcement Network published Advisory 2020-2. The Notice states that FinCEN intends to change its regulations regarding the reporting of foreign financial accounts to include digital currency as a type of account to be reported.
Put simply, this means that FinCEN may soon require crypto users to file Annual Foreign Bank and Financial Accounts, or FBARs, for cryptocurrencies held on foreign exchanges. The effects of such an amendment are considerable. Just a long paragraph, the notice has several implications that affect crypto owners – far beyond a simple FBAR report.
Currently, cryptocurrency accounts are not reportable accounts within the meaning of FBAR regulations. In the event of a change, crypto owners – already burdened with increased focus from the Internal Revenue Service – would then be required to report the highest aggregate balances in their crypto accounts to FinCEN annually.
This requirement is in addition to the cryptographic disclosure question on IRS Form 1040, Personal Income Tax Return. In addition to disclosing the highest aggregate balance, the owner of the crypto must also disclose the custodian of the crypto, its location, and the crypto account number (or other identifier). Assuming the reporting rules remain the same, crypto accounts would be reported on the FinCEN 114 form and filed electronically by April 15 of the following applicable year (such as tax returns).
Crypto FBAR Requirements
But not all crypto accounts would be reportable. The FBAR reporting requirement only applies to foreign accounts with balances in excess of $ 10,000 (in total) for the tax year. Thus, if two accounts have a combined account balance greater than $ 10,000 at any one time, both accounts must be reported.
For example, if one holds $ 4,000 of Cardano (ADA) and another $ 7,000 of Bitcoin (BTC) on a non-U.S. Exchange, both holdings are reportable because, together, they exceed $ 10,000. Therefore, crypto owners should carefully monitor the fair market value of their crypto accounts throughout the year in a volatile market. What is worth $ 5,000 today could pass the $ 10,000 threshold in no time.
Penalties and omissions of disclosure
And not disclosing a reportable account is a foolish task. The FBAR sanctions are draconian. For “unintentional” breaches of FBAR filing, the penalty is $ 10,000 per failure. The courts are currently in the process of determining whether this $ 10,000 is per account per year or just per FBAR owed.
The IRS – not surprisingly – takes the first view. If the $ 10,000 penalty is per account per year, it’s easy to see how the FBAR penalties can easily exceed the actual balances of the accounts themselves. In other words, a taxpayer could pay more FBAR penalties than the value of his accounts. And for “deliberate” non-compliance, the penalties falter because of inviolability. They prescribe a civil penalty for willfully failing to deposit an FBAR of up to $ 100,000 or 50% of the account balance at the time of the violation. Willful violations include both conscious and reckless non-disclosure.
There is yet another requirement arising from possible changes in FBAR regulations. At the bottom of Schedule B of Form 1040, there is a series of questions about foreign bank accounts. Presumably, if crypto accounts fall under the new FBAR regulations, a taxpayer reporting FBAR will also need to answer the questions in Schedule B in the affirmative. And answering in the negative is not a good choice. Falsely answering “no” to the foreign bank account questions in Schedule B is considered “voluntary” behavior in the eyes of the IRS.
And most importantly, unlike the FBAR rules, there is no account value threshold with the questions in Schedule B. Voluntary disclosures of foreign bank accounts do not begin and end with the filing of an FBAR. annual. Where applicable, the taxpayer should also honestly answer the questions on foreign bank accounts in Schedule B.
Unfortunately, the work does not end there. While crypto accounts are considered reportable accounts under FBAR regulations, they are naturally reportable accounts under IRS Form 8938. If US taxpayers have a financial interest in specified foreign financial assets and meet certain thresholds of account balance, they must also file Form 8938 with their Form 1040 Personal Income Tax Return. Form 8938 is an attachment to Form 1040. The same foreign bank accounts reportable under FBAR regulations are currently the same types of accounts reportable on Form 8938. Indeed, FBAR disclosures are found on Form 8938.
However, the reporting thresholds are different. To be reportable, for unmarried taxpayers, foreign bank account balances must exceed $ 50,000 on the last day of the tax year, or if they are greater than $ 75,000 at any time of the year, to involve Form 8938. Thresholds are higher for spouses. taxpayers. And like the FBAR, the penalties are severe. There is a penalty of $ 10,000 for failure to disclose on Form 8938 and an additional $ 10,000 for each 30 days of non-filing after the IRS notifies the taxpayer of a failure to disclose for a potential maximum penalty. of $ 60,000.
Criminal penalties may also apply. In fact, FBAR and Form 8938 are two peas in a pod, and a crypto owner may need to report both forms. For a good comparison of the FBAR and Form 8938, see here.
Crypto tax amnesty
In all of this there may be a glimmer of good news. I have advocated for a crypto tax amnesty program before, and this may be a case where an amnesty emerges. Currently, there are several procedures for voluntary disclosure in case of non-filing of FBAR. Presumably, if crypto accounts are the types of accounts that must now be reported under FBAR regulations, the same amnesty procedures should apply to crypto accounts as well. Unless the new regulations provide an exception, crypto accounts may belong to those types of accounts available to participate in offshore voluntary disclosure procedures. Importantly, the procedures encompass “both” penalties for non-disclosure and penalties for non-filing of income. It’s an amnesty program that covers both.
For example, suppose the new FBAR regulations go into effect in 2021. A crypto owner named Joe does not report capital gains on his crypto in the 2021, 2022, and 2023 tax years. Every year Joe fails to report capital gains on his crypto during the 2021, 2022, and 2023 tax years. not to deposit FBAR on its crypto either. accounts. Then, in 2024, Joe wants to be frank. Presumably, Joe can then participate in FBAR’s voluntary disclosure procedures and capture both his inability to deposit his FBARs as well as his inability to report his crypto capital gains. Although Joe must pay a miscellaneous 5% penalty under voluntary disclosure procedures, he can avoid the “unintentional” $ 10,000 penalty for each year and avoid any additional penalties associated with not reporting crypto income. including the 20% related to accuracy. sanctions and civil penalties for fraud. This can be a backdoor to the crypto tax amnesty.
What started out as a harmless one-paragraph notice, Notice 2020-2 has broad implications. It is not uncommon for a tax declaration obligation to affect one or more tax forms as is the case here. Crypto owners are well served to understand the magnitude of the tax code. A misstep in one area is probably a misstep in another.
This article is for general information purposes and is not intended to be and should not be construed as legal advice.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of TBEN.
Jason morton practices law in North Carolina and Virginia and is a partner at Webb & Morton PLLC. He is also a judge advocate in the Army National Guard. Jason focuses on tax defense and tax litigation (foreign and domestic), estate planning, business law, asset protection, and cryptocurrency taxation. He studied blockchain at the University of California at Berkeley and studied law at the University of Dayton and George Washington University.