FATCA & Bitcoin
FATCA and Bitcoin Reporting: Over the past few years the, U.S. government (and IRS specifically) has strictly enforced cryptocurrency reporting and tax related compliance. This is especially true when the Bitcoin is located abroad. When it comes to FATCA reporting of Bitcoin, it is more complex than FBAR reporting. That is because whether or not Bitcoin is in a personal wallet or foreign account/Exchange will impact whether the foreign financial institution (FFI) disclosure rules would take effect.
Since Bitcoin is an asset, and certain specified foreign financial assets are reportable on Form 8938 — whether or not they are in a foreign account — makes the analysis complex. For example, while stock shares are reported on Form 8938 for FATCA, they are not reported on the FBAR. Likewise, a stock account is generally reported for both FATCA and FBAR.
Let’s explore FATCA Reporting and Bitcoin.
What is FATCA?
FATCA is the Foreign Account Tax Compliance Act.
It requires the reporting of certain Specified Foreign Financial Assets to the IRS.
The law itself involves reciprocal intergovernmental disclosure agreements between the United States and foreign countries to facilitate Financial transparency and eliminate offshore tax evasion.
For U.S. tax filers, FATCA compliance is completed by filing the Form 8938.
Is Bitcoin an Asset?
Yes. Even though oftentimes Bitcoin it is treated as currency, the Internal Revenue Service does not recognize Bitcoin as currency. Rather, it is categorized as an “asset.”
Therefore, if you have Bitcoin, then technically you have an asset. And, if you have an asset that is located abroad, then you may have a FATCA reporting situation, because you now have a foreign asset.
Bank Account vs Stock Certificate vs Stock Account
Here is a common example of how reporting works for FATCA:
When a person has a stock certificate, it is reportable on the Form 8938, since it is a Foreign Asset.
A stock certificate is not reported on the FBAR. That is because the FBAR is used to report foreign financial accounts.
While a stock certificate is not reported on the FBAR, a stock account is reported on the FBAR, because a stock account is an Account.
Since the Form 8938 (FATCA) is used to report foreign assets (and accounts), and Bitcoin is an “Asset,” there is the concern that the Bitcoin is reportable on the 8938, even if it is not in an account, because it is a foreign financial asset.
Cryptocurrency Enforcement is on the Rise
The IRS has taken a keen interest in the enforcements of Cryptocurrency. Some of the more recent enactments, include:
- Coinbase Subpoena
- 6173 & 6174 Letters
What is J5?
The U.S. joined J5 in 2018.
J5 is used to enforce cryptocurrency compliance for U.S person.
As provided by the IRS:
“The Joint Chiefs of Global Tax Enforcement (known as the J5) are committed to combatting transnational tax crime through increased enforcement collaboration. We will work together to gather information, share intelligence, conduct operations and build the capacity of tax crime enforcement officials.
The J5 comprises the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), the Fiscale Inlichtingen- en Opsporingsdienst (FIOD), HM Revenue & Customs (HMRC), and Internal Revenue Service Criminal Investigation (IRS-CI).
We are convinced that offshore structures and financial instruments, where used to commit tax crime and money laundering, are detrimental to the economic, fiscal, and social interests of our countries. We will work together to investigate those who enable transnational tax crime and money laundering and those who benefit from it. We will also collaborate internationally to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime and to make the most of data and technology.”
J5 Enforcement Initiative
“To actively bring about change, the J5 will:
- Develop shared strategies to gather information and intelligence that will strengthen operational cooperation in matters of mutual interest, and target those who seek to commit transnational tax crime, cybercrime and launder the proceeds of crime
- Drive strategies and procedures to conduct joint investigations and disrupt the activity of those who commit transnational tax crime, cybercrime, and also those who enable and assist money laundering
- Collaborate on effective communications that reinforce that J5 is working together to tackle transnational tax crime, cybercrime and money laundering.”
IRS Coinbase Summons
In 2018, the IRS issued a Summons to Coinbase in order to get details about certain customers.
As provided by Coinbase:
“On February 23rd, 2018, Coinbase notified a group of approximately 13,000 customers concerning a summons from the IRS regarding their Coinbase accounts.
The court ordered Coinbase to provide taxpayer ID, name, birth date, address, and historical transaction records for certain higher-transacting customers during the 2013-2015 period.”
Cryptocurrency 6173 & 6174 Letters
The 6173 and 6174 letters involve IRS enforcement of Cryptocurrency Compliance. As provided by the IRS:
“The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.
For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.
Taxpayers are pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.
Last year the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
Virtual currency is an ongoing focus area for IRS Criminal Investigation.
IRS Notice 2014-21 (PDF) states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.
The IRS anticipates issuing additional legal guidance in this area in the near future.
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.”
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