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Cryptocurrency US Tax laws and Foreign Reporting Requirements.

Is Cryptocurrency (i.e. Bitcoin) reportable if held in a foreign jurisdiction under the Foreign Bank and Financial accounts (FBAR) regulations? The quick answer is NOT CURRENTLY.  However, be prepared for possible changes.

Ever since the creation of cryptocurrency, income tax and reporting laws have been confusing, changing and a lot of people might not want to accept the laws.  Internal Revenue Service (IRS) Notice 2014-21 stated that the following highlights:

  1. Virtual currency may be used to pay for good and services or held for investments but does not have legal tender status in any jurisdiction.
  2. Virtual currency that has an equivalent value in real currency or that acts as a substitute for real currency is referred to as “convertible” virtual currency.
  3. The sale or exchange of convertible virtual currency or the use of convertible virtual currency to pay for goods or services in a real-world economy has tax consequences that may result in a tax liability.
  4. The IRS treats virtual currency as property.  Thus, if property is mined, income should be reported at the FMV of the property less the mining expenses.  A mining operation may trigger income subject to self-employment tax.
  5. If virtual currency is received as payment for goods or services, the taxpayer must report the payment based on the FMV.
  6. Does a taxpayer have gain or loss upon the exchange of virtual currency for other property?  The IRS says yes.
  7. Do payments in virtual currency require information reporting using W-2’s and 1099’s?  Yes, if payment is considered wages or 1099 reportable, then those documents are required.
  8. Notice 2014-21 didn’t really take a position on the question about reporting virtual currency in a foreign account, so fortunately there is updated information.

Just recently, the AICPA contacted the Treasury Financial Crimes Enforcement Network (FinCEN) to ask if virtual currency in a foreign account would need to be reported on form FATCA and 8938, Statement of Specified Foreign Financial Assets.  FinCEN informed the AICPA that currently, virtual currency held in an offshore account is not reportable pursuant to 31 C.F.R Reg. 1010.50(c).  FinCEN did state that the discussion with IRS on this issue continues to be evaluated.

Vertical Advisors, LLP is a boutique accounting and tax firm, that has experience with virtual currency and taxation.  Please contact us if you have additional questions.

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