International Reporting of Cryptocurrencies

We’ve read about the rise and fall and rise and fall—you get the idea—of Bitcoin. Bitcoin is just one of a number of cryptocurrencies currently being exchanged worldwide. Also known as virtual currencies, computerized transactions are verified and recorded in a publicly distributed ledger, called a blockchain. This ledger remains mostly anonymous, hence the reason many are lured toward the use of cryptocurrencies in everyday transactions. The exchange of cryptocurrency is mostly performed by specialists such as, BTCChina, Coincheck, Coinbase and LocalBitcoins, but are also exchanged privately between users. Because these types of currencies are less impacted by physical boundaries, one question is how might this affect international reporting protocols?  

Cryptocurrency exchangers that register as a money transmitter must develop, implement and maintain an effective anti-money laundering program that includes a process for verifying customer identification. The IRS wishes to identify records that will reveal the identity and transaction activity of cryptocurrency users who are U.S. persons. This information may be used to identify and correct federal income tax liabilities of those who conducted convertible virtual currency transactions as defined in IRS Notice 2014-21.

Holding virtual currencies in a foreign exchange marketplace may trigger an “other foreign asset” that is reportable on IRS Form 8938. The treasury has not yet issued guidance about these exchanges being considered a “financial institution” or a wallet to be considered a “financial account,” which would require reporting on the Foreign Bank and Financial Account Report (“FBAR”) and Form 8938.

If there is uncertainty about if the exchange is foreign, it is best to consider reporting the asset rather than not reporting it at all. This is strictly for informational purposes; there is no actual tax computed on the value of your foreign holdings. The IRS has steep penalties for failing to report these types of information. So, if you want to avoid risking a $10,000 IRS penalty for non-filing, play it safe and disclose all holdings.

Matthew Halpern is a Tax Manager working in various industries such as professional services, information technology, and manufacturing and distribution. He also works with expatriates and foreign individuals with U.S. activity.

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