Cryptocurrencies & Foreign Bank Reporting: What You Must Know

In today’s world we are seeing drastic changes in how we interact with our environment. Those interactions are becoming predominantly electronic through the use of phones, computers, watches, etc. Our currency is following suit. By now, many have heard the terms “bitcoin” or “cryptocurrency” – but do they understand the concept? The news regularly reports on how this electronic currency enables us to complete transactions in ways that we have not experienced in the past. While this technology is being embraced by some, there may be unexpected tax-reporting implications that the headlines often miss. It’s imperative for taxpayers engaging in foreign banking and potentially, in cryptocurrencies, to understand basic information related to foreign reporting requirements.

The Basics of Cryptocurrency
What is “Bitcoin” and how does it work? Bitcoin is a type of cryptocurrency, which is a digital virtual currency housed online. It is generally held in a virtual “wallet.” These virtual wallets operate like bank accounts in which a third party holds the currency. Cryptocurrency can be purchased using traditional analog currency, such as U.S. Dollars, Euros, British Pounds, etc. Bitcoin is the most popular form of cryptocurrency, and it is used as a functional currency by many major retailers including Amazon, Sears, Home Depot, and CVS. While some use cryptocurrency to function like traditional currency, many are using it for investment purposes in a manner similar to that of stocks being traded on an exchange.

Foreign Bank Account Reporting in General
The U.S. Department of the Treasury and the IRS want to be informed as to where taxpayers are keeping their bank accounts and their respective balances. Two main documents that taxpayers involved in the use of foreign banking should be aware of are the U.S. Department of the Treasury Foreign Bank and Financial Accounts Report (Form 114) and the IRS Statement of Specified Foreign Financial Assets (Form 8938). These two foreign reporting forms are applicable to U.S. citizens, residents, corporations, partnerships, and even trusts, and must be filed (along with a normal federal income tax return) if the filing requirements are met. In general, Form 114 is applicable if a taxpayer is holding a bank account outside the United States and the balance in the account exceeds $10,000 USD at any point during the tax year. Form 8938 would become applicable (in addition to or separate from Form 114) if the bank account balance exceeds $50,000 ($100,000 for married filers) for the tax year. Both forms are informational to the applicable governmental agency and no taxes are paid on the balance. However, severe penalties can and will be assessed for a failure to file these required forms.

Cryptocurrencies as Foreign Bank Accounts
Since cryptocurrencies are electronic currencies tied to a virtual wallet, it is possible that the wallet where the cryptocurrency is held may be located in a foreign country. While there is currently no official guidance related to foreign reporting for cryptocurrencies, it is possible that a taxpayer owning cryptocurrency could have foreign reporting requirements based solely on the location of the wallet. The IRS recently notified the public that letters are being sent to taxpayers who are cryptocurrency holders, urging them to comply with U.S. tax laws related to cryptocurrencies. We will provide details about additional reporting requirements, and other potential tax implications for cryptocurrency holders, as they become available.

Please contact a member of the HBK Tax Advisory Group at 239-263-2111 if you would like to discuss potential foreign reporting requirements for cryptocurrency or any foreign banking matters.

Additional Resources:
https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar

https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf

https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies

https://bitcoin.org/en/how-it-works

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About the Author(s)

Amy L. Dalen, JD is a Principal and Tax Advisory Group Chair at HBK CPAs & Consultants and provides support services for the CPAs in all HBK offices. She is a member of the HBK Tax Advisory Group, specializing in estate, gift, trust, and individual taxation. As a member of the Tax Advisory Group, Ms. Dalen researches complicated tax issues, provides compliance reviews for tax returns and trust accountings, and analyzes and plans for the estates of high net worth individuals. She works closely with the other professionals of HBK, their clients, and the attorneys and other professionals that make up the client’s team of advisors. Prior to joining HBK, she worked for a Top 100 accounting firm in Maine preparing and reviewing complicated tax returns, providing tax planning for high net worth individuals and their businesses, and researching complicated tax issues.

Gerd Franke, CPA, is a Principal in the Naples, Florida office of HBK CPAs & Consultants. He joined HBK in 1999. Having moved here from his native Germany in 1994, Gerd’s specialty niche areas include private and business clients with international tax issues, nonresident alien matters and foreign-owned real estate interests. He is extremely active in the local community and serves as a member of the Rotary Club of Naples North and the United States Tennis Association (USTA).

Frederik J. Sdrenka is an associate member of the HBK Tax Advisory Group and is located in the Naples office in southwest Florida. Frederik began his career in public accounting with HBK in early 2018, and specializes in foreign and international taxation matters for individuals and corporations.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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