For years, Treasury has advised taxpayers that virtual currency is not required to be reported on the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, or what used to be called the FBAR. That appears to be changing. FinCEN has now announced an intention to amend the rules to require FBAR disclosures for virtual currency like Bitcoin.
Currently, United States persons are required to file an FBAR if they hold 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.
(You can find out more about FBAR requirements - as they stand now - in a recent edition of the Taxgirl podcast here.)
In 2014, the Internal Revenue Service (IRS) was still trying to wrap its head around Bitcoin. That year, it 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. You can read Notice 2014-21 here (downloads as a PDF).
(You can find out more about cryptocurrency - and how it’s taxed - on the Taxgirl podcast here.)
But Notice 2014-21 didn’t specifically mention the FBAR. And the income tax treatment of assets is not the same as the reporting requirements for FBAR purposes.
On June 4, 2014, Rod Lundquist, a senior program analyst for the Small Business/Self-Employed Division, was asked about this issue and confirmed that, for FBAR purposes, Bitcoin was 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."
The IRS further confirmed that treatment, stating, “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.”
Now, FinCEN is taking a different tack. On December 30, 2020, FinCEN published a short notice. That notice, FinCEN Notice 2020-2, reads:
Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency).
However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.
(Emphasis is mine.)
You can read the notice here (downloads as a PDF).
It’s clear that the IRS is getting serious about cryptocurrency: a question about use of cryptocurrency now appears on Form 1040.
So far, neither Treasury nor FinCEN has issued further comment about the notice, including any indication about when the timing will kick in.
The FBAR is an annual report, due on the same day as your tax return, which is normally April 15 (plus any extensions). It’s a busy year for the IRS - especially with form changes as a result of the CARES Act and the recent spending/stimulus/extenders bill - so I’m not convinced we’ll see a change that goes into effect retroactively for the tax year 2020 and reportable in 2021. But if we’ve learned anything over the past year, it’s that anything can happen. Stay tuned.