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Tax compliance has been a pertinent headline issue under the spotlight in recent times in both the UK and the US, requiring individuals to bring their tax affairs up to date on both sides of the Atlantic.
What is Virtual Currency?
Before we go into the FBAR Reporting implications of cryptocurrency, it is necessary to set the scene of what one is and what it does. According to Investopedia, cryptocurrency is “a digital or virtual currency that uses cryptography for security.” The IRS themselves have defined cryptocurrency as “a digital representation of value that functions as a medium of exchange, a unit, and/or a store of value.” We can safely conclude for the purpose of this article that it is a form of digital currency which can be used as a medium of exchange. Due to its decentralised nature relying on blockchain technology, it is outside of the realms of governmental intrusion and operation. Therefore, you can see the growing attraction for it, since the inception of the popular Bitcoin, many new coins have been introduced to the cryptocurrency market by way of Initial Coin Offerings.
The Current Situation
We are clear as to the tax filing implications, in that, capital gains tax is due if you bought and sold cryptocurrency, whether it was a short-term capital gain/loss or a long-term capital gain/loss, as you are cashing out on your cryptocurrency for legal tender. The Internal Revenue Service have already started sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. It seems that the letters being sent out by the IRS are just the beginning of this issue. Individuals should take this opportunity to review their reporting.
The issue lies in whether the value of your cryptocurrency is reportable on the FinCEN Form 114 as assets held by a Foreign Financial Institution (FFI). If it was reportable, then the so-called “wallet” would be categorised as a foreign account that would be reported on the FBAR, however this is not the case. A further issue is that cryptocurrency owners use a foreign third-party exchange to buy and sell the coins, for instance Coinbase and Binance, therefore, in this circumstance you have a situation which is similar to an FFI, however, again this has not been considered to be reportable for the purposes of the FBAR.
To gain clarity on this matter once and for all, the AICPA Virtual Currency Task Force reached out to Treasury’s Financial Crimes Enforcement Network (FinCEN) to help practitioners answer this question. They welcomed FinCEN’s stance on this, the relevant regulations (31 CFR s.1010.350(c)) do not classify virtual currency held in an offshore account as a type of reportable account. In conclusion, as it stands, cryptocurrency is not reportable for the purposes of the FBAR, however, this is clearly a developing matter and this view could change in the future as the popularity of this virtual investment grows.
Nomaan Ilyas is Managing Director of Frontier Group, a firm of advisers specialising in US, UK and International Tax return preparation services and advice. You can contact him on 020 7332 2843, firstname.lastname@example.org, www.frontier-fs.com.