Today we discuss the FBAR that is due tomorrow.
I did intend to write this earlier however I have been tied up with the October 15th deadline.
General
The United States FinCEN requires taxpayers who own or control foreign bank accounts with a total value exceeding $10,000 (at any time during the year) to file a report known as the FBAR.
The FBAR is due by April 15th, however it has been extended until October 15th separate from the taxpayer's income tax return. (Note for investors with $75-$100k, there is a second form to consider, Form 8938, but it will not be discussed today and is due with the income tax return).
Some great general information is here: https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar
The official name of the forms are:
- FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
- Form 8938, Statement of Foreign Financial Assets
How the IRS views Cryptocurrency
The IRS issued Notice 2014-21 indicating the cryptocurrency is property for U.S. tax purposes (and not subject to foreign currency rules). Gains are subject to U.S. tax.
There has been limited official guidance/commentary on the FBAR, and any such guidance is outdated. When crypto was a much smaller industry, there was some indication Bitcoin would not be subject to FBAR reporting but only for 2014 (see footnote #4 item #10 here: https://www.aicpa.org/Advocacy/Tax/DownloadableDocuments/AICPA-Comment-Letter-on-Notice-2014-21-Virtual-Currency-6-10-16.pdf). Until further guidance is issued, it is advisable to be conservative and not rely on this 2014 "exemption" if you could even call it that - of course consult your own personal advisor to discuss.
This author believes the FBAR applies to crypto held on foreign exchanges, as the American Institute of Certified Public Accountants (AICPA) also suggests per the link above.
Penalties
A little discussed fact about IRS crypto Notice 2014-21. When Notice 2014-21 was issued, it was applied retroactively and the IRS left the door open to penalties to taxpayers who filed tax returns prior to the Notice issuance.
That being said, the FBAR penalties are very severe:
- $12,459 - in the case of non-willful violations
- $124,588 in the case of r “willful” violations (or if higher, 50% of the account balance).
Is my Crypto Offshore?
If a wallet key resides off-shore or a taxpayer hold assets through an exchange that is located outside of the United States (i.e. Binance, Bitfinex, etc.), then likely the virtual currency is offshore.
Here are a few to consider:
- Binance - may reside in China/Hong Kong, and/or Malta
- Bitifinex - Hong Kong
- Cryptopia - New Zealand
- Bitgrail - Italy
- Genesis Mining - Iceland
The addresses aren't all publicly available but a quick google or Reddit search can yield much of the appropriate data
A conservative approach to inactive/dust accounts or cloudmining services
It is advisable to report inactive accounts if active accounts took a taxpayer over the $10,000 USD threshold.
How is crypto valued for FBAR
Cryptocurrency accounts can either be valued as monmonetary asset accounts or foreign currency accounts for FBAR, as there is no guidance on how the FBAR rules apply. The results can be different drastically. The Monmonetary approach examines the daily balance of the FBAR accounts in terms of their USD value, whereas the foreign currency approach applies a year-end spot rate to the maximum amount of the foreign currency in the account. The foreign currency applies when a traditional bank account is held in foreign currency (i.e. Euros).
Consult YOUR OWN advisor on how to approach which method to use above
How to practically account for this in software like CoinTracking?
The following method only works if deposits/withdrawals and trades are all in CoinTracking (https://cointracking.info?ref=C16086), the method won't work if just trades alone are in the software
If a taxpayer will report crypto on the FBAR with the value of a nonmonetary asset, here are a few steps to estimate the daily balance to help estimating whether the values exceeded the reporting threshold:
- 1 - Using CoinTracking, a taxpayer can import foreign exchange data straight into the tool.
- 2 -Then they can export to excel the full transaction history for 1/1/2017-12/31/2017. In advanced settings, add the USD buy/sell values that are calculated by CoinTracking as columns to export. Note: Make sure to filter dates in chronological order prior to exporting, otherwise the formulas final steps will need to be applied in reverse order
- 3 - In excel file, create a filter and filter trade data in the column for the exchange to be for the foreign exchange and copy over only the visible cells to another tab.
- 4 - Use an excel formula to create a cumulative daily balance. (+[cell for the day's USD buys/deposits] and -[cell for the day's USD sells/withdrawals] +[previous trade days USD balance from the prior row, the first trade won't have this].
- 5 - Scan data for highest daily value
- 6 - Using alternative exchange data, account for any other value spikes that occurred on a day with no trading activity. This is the major shortcoming of the method. The method works best when crypto is quickly withdrawn to a private wallet off of an exchange.
- 7 - Repeat for all foreign accounts and aggregate applying the general rules for (1 ) testing the threshold and (2) reporting as discussed in the IRS link.
If a taxpayer will report crypto on the FBAR with the year-end values using "Foreign currency" rules, the USD value columns will need to be manually created by copying and pasting 12/31/2017 exchange data into separate tabs for each currency used on the foreign exchange and multiplying it times the foreign currency deposits/buys versus withdrawals/sells. Then, use a formula to track the cumulative balance. Otherwise, the approach above can be followed to estimate the reporting threshold.
The above is just one method of reasonably estimating the FBAR reporting thresholds/values, if any readers have another method please share. Anyone reading this should discuss any method employed with his/her personal tax advisor as I take no responsibility for the information that a reader reports to the FINCEN. This method is NOT perfect and depending on someone's personal circumstances or how exchange data was input into CoinTracking, it may turn out to be unreliable.
Filing the FBAR
The FBAR can be self- filed here (although it is recommended to go through a professional advisor to file this ):
https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html
Takeaway
A U.S. crypto investor using foreign exchanges should consider consulting a tax advisor to determine whether the FBAR should be filed by October 15th.
Picture Credit https://pixabay.com/en/users/Bru-nO-1161770/
Disclaimer: This series contains general discussion of U.S. taxes and FINCEN Reporting in a developing and unclear area of tax law (and FATCA/FINCEN law). As always, you should consult your own tax/FATCA/FINCEN advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post does not create a client relationship between the author and the reader.