Tax practitioners and taxpayers alike have long grappled with whether virtual currency, aka cryptocurrency, is reportable for purposes of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Normally the value of fiat currency, i.e., U.S. dollars and other assets held by a foreign financial institution (FFI) on behalf of a taxpayer, is reportable on FinCEN Form 114 when the aggregate value of all offshore accounts exceeds $10,000 at any point during the tax year.
Virtual currencies have several simultaneous properties that make them challenging for practitioners and regulatory bodies to classify. Sometimes cryptocurrency is an alternative medium of exchange, a store of value, a utility, a 1:1 peg to fiat currency (stable coins), or a tokenization of assets (securities or real estate), or it can have several of these properties at the same time. This is the classic regulatory lag all technology goes through as we move from gray areas into a realm of clarification.
While practitioners have also pondered if wallets (free downloadable software) could be a reportable account, the exercise was more professional due diligence because it is an example of true self-custody. The issue arises when a taxpayer uses a foreign third-party exchange to buy and sell virtual currency, for example bitfinex or bitstamp. The exchange in this case is akin to an FFI, but the question remains if a customer account is considered a reportable account for FBAR purposes.
The AICPA Virtual Currency Task Force reached out to Treasury’s Financial Crimes Enforcement Network (FinCEN) to help practitioners answer this question. FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. This may change in the future, especially considering the influx of stable coins, so practitioners should stay abreast on this topic. FinCEN did tell the task force that it, “in consultation with the IRS, continue[s] to evaluate the value of incorporating virtual currency held offshore into the FBAR regulatory reporting requirements.” Absent this clarity, the conservative approach would be filing the FBAR.
A taxpayer could have U.S. dollars on a foreign third-party exchange in addition to virtual currency, therefore the U.S. dollar amount should be considered for filing purposes. Also keep in mind that Foreign Account Tax Compliance Act (FATCA) and Form 8938, Statement of Specified Foreign Financial Assets, compliance is administered by the IRS; therefore, while the reporting is similar, this article only applies to FBAR.
― Kirk Phillips, CPA, CMA, CFE, CBP, is a blockchain and cryptocurrency adviser and a member of the AICPA Virtual Currency Task Force. To comment on this article or to suggest an idea for another article, contact Alistair M. Nevius, The Tax Adviser’s editor-in-chief, at Alistair.Nevius@aicpa-cima.com.