Changes May Be Coming to Offshore Cryptocurrency Disclosures in 2021

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) recently announced plans to propose a new disclosure requirement for U.S. taxpayers with offshore cryptocurrency accounts. If the proposal moves forward, all taxpayers who own more than $10,000 in cryptocurrency held in offshore accounts would be required to file FinCEN Form 114, Report Foreign Bank and Financial Accounts (FBAR) on an annual basis.

As Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, while the obligation to file another form on Tax Day might not seem significant, cryptocurrency investors will need to be extremely careful when preparing their FBARs, and even inadvertent mistakes can have serious consequences. The penalties for FBAR noncompliance start in the thousands of dollars, and they climb to $500,000 plus 10 years of federal imprisonment for willful noncompliance accompanied by other federal statutory violations (i.e., failure to pay income tax on cryptocurrency returns).

What are the Current Offshore Cryptocurrency Disclosure Requirements?

While FinCEN’s proposal would add to many cryptocurrency investors’ reporting obligations, investors are already subject to several disclosure requirements. These include:

1. Filing an FBAR for Any Offshore Accounts that Hold Cryptocurrency and Other Assets

While the FBAR filing requirement does not currently apply to offshore accounts that exclusively hold cryptocurrency, it does apply to offshore accounts that hold cryptocurrency and other assets. If an account contains more than $10,000 in reportable assets at any point during a tax year, then the account triggers the FBAR filing requirement irrespective of whether it also holds cryptocurrency. As FinCEN Notice 2020-2 explains:

“Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. . . . [A]t this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account . . . because it holds reportable assets besides virtual currency).”

2. Filing IRS Form 8938 Under FATCA

Separate from the FBAR filing requirement, many cryptocurrency investors are required to file IRS Form 8938 under the Foreign Account Tax Compliance Act (FATCA). While the FBAR filing requirement applies to foreign financial accounts worth $10,000 or greater, FATCA applies to foreign financial assets with an aggregate value of $75,000 at any time or $50,000 at the end of the tax year.

3. Reporting All Cryptocurrency Gains and Losses on Federal Income Tax Returns

Regardless of whether cryptocurrency is held in the U.S. or offshore, investors have an obligation to report all gains and losses on mining, sales and other transactions to the Internal Revenue Service (IRS). The IRS has indicated that it intends to aggressively enforce cryptocurrency investors’ federal income tax obligations, and, here too, noncompliance can lead to substantial penalties.

Request an Appointment with Virginia Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

Do you have questions about FBAR compliance or general tax law compliance with regard to cryptocurrency? If so, we encourage you to contact us promptly. To request an appointment with Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 703-752-3752, email ket@thornlawgroup.com or tell us how we can reach you online today.