Author's Update: In response to my query earlier today regarding disclosure, IRS issued this statement: The Financial Crimes Enforcement Network, which issues regulatory guidance pertaining to Reports of Foreign Bank and Financial Accounts (FBARs), is not requiring that digital (or virtual) currency accounts be reported on an FBAR at this time but may consider requiring such accounts to be reported in the future. No additional guidance is available at this time.
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Today, U.S. taxpayers around the globe will be scrambling to meet the June 30 deadline for mandatory electronic filing of the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, or what used to be called the FBAR. It's a firm deadline: there are no extensions.
Those United States persons who are required to file an FBAR includes those with a financial interest in or signature authority over at least one financial account located outside of the United States if the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year. The reporting obligation may exist even if there's no associated taxable income. If you fail to file an FBAR, you can be socked with some pretty hefty penalties: up to $10,000 per violation for non-willful violations and up to $100,000 or 50% of the balance in the account for willful violations.
For purposes of the FBAR, a financial account is defined as a bank account, such as a savings, demand, checking, deposit, time deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. It also includes an account set up to secure a credit card account; an insurance policy having a cash surrender value is an example of a financial account; securities, securities derivatives, or other financial instruments account; mutual funds and and similar accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund.
It's a pretty broad scope. But what's more interesting than what is included is what is excluded: taxpayers don't have to report certain Bitcoin holdings.
Bitcoin is a digital currency. It doesn’t rely on an exchange of paper and there is no centralized bank that records the transaction. Instead, Bitcoin is often stored in a digital “wallet” which can be found on your computer.
The Internal Revenue Service is still trying to wrap its head around Bitcoin. It recently issued guidance to taxpayers on how to treat Bitcoin – and other virtual currency – for federal income tax purposes. Saying that "virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes," the IRS determined that Bitcoin and similar currencies are to be treated as a capital asset (more on that here).
However, the income tax treatment of assets is not the same as the reporting requirements for FBAR purposes. On June 4, Rod Lundquist, a senior program analyst for the Small Business/Self-Employed Division, confirmed that, for FBAR purposes, Bitcoin is not reportable "...not at this time." He followed up by saying that "FinCEN has said that virtually currency is not going to be reportable on the FBAR, at least for this filing season."
It's worth noting that Lundquist's comments are not to be considered official guidance. In fact, there isn't any official written guidance available just yet. The IRS has has been slow to issue definitive guidance on both the taxation and reporting of Bitcoin, which has been confusing for taxpayers. And it could get more confusing: Lundquist cautioned that FBAR reporting requirements for Bitcoin could change "as we monitor what happens in the future."
Lundquist did not offer details on whether how the Bitcoin is held would affect reporting requirements. However, we do have some direction based on the guidance for other assets, such as gold and precious metals.
Here's how it seems to shake out for now: for FBAR purposes, those Bitcoin held individually in a wallet aren't reportable. You can think of it like gold in that regard: gold coins, other precious metals or foreign currency held directly are not reportable for FBAR purposes.
In contrast, I think it's likely that Bitcoin exchange accounts need to be reported (but see update above). This would be consistent with the IRS treatment of gold and foreign currency held in accounts. Converting those assets from directly held assets to accounts makes them reportable.
This nuance is important when it comes to the rules for precious metals and like assets and that nuance likely extends to Bitcoin. However, since there is no definitive guidance, those that hold Bitcoin in exchanges or in other forms will have to make some important decisions about disclosure and reporting. It's a discussion you should absolutely have with your tax professional: among the considerations are those steep failure to file penalties.
Moving forward, the IRS offers this advice: stay tuned.
As for today, if you need help to complete your FBAR, you can call 866-270-0733 (toll-free inside the U.S.) or 313-234-6146 (not toll-free, for callers outside the U.S.) Monday through Friday, 8 a.m. to 4:30 p.m. Eastern Time. You can also try giving email a shot (FBARquestions@irs.gov) but don't hold your breath for an answer before the end of business today. Filers residing abroad may also contact U.S. embassies and consulates for assistance.
