The U.S. Treasury Department is sharpening its cryptocurrency sword once again. In January 2021, the Treasury’s Financial Crimes Network sent the 2-2020 Notice. The announcement says FinCEN intends to change its reporting rules for foreign financial accounts to include digital currency as a reporting account.
In simple terms, this means that FinCEN may soon require cryptocurrency users to submit annual reports from foreign banks and financial accounts or FBARs for cryptocurrencies housed on foreign exchanges. The consequences of this change are far-reaching. Just a long paragraph, this note has several implications for carriers of cryptocurrencies – beyond just a simple FBAR report.
Currently, cryptocurrency accounts are not subject to reporting under FBAR. In the event of changes, cryptocurrency holders who are already burdened with increased attention from the Internal Revenue Service will be required to report their highest cryptocurrency total account balance to FinCEN annually.
This requirement is in addition to the issue of cryptocurrency disclosure in IRS 1040, Individual Tax Return. In addition to entering the highest total balance, the owner of the cryptocurrency must also provide the cryptocurrency manager, its location, and the crypto account number (or other identifier). Provided that the reporting rules remain the same, the Form 114 FinCEN crypto accounts will be submitted and filed electronically by April 15 of the following year (in the form of a tax return).
FBAR encryption requirements
However, not all cryptocurrencies can be reported. The FBAR deposit requirement applies only to foreign accounts with balances greater than $ 10,000 (gross) for the tax year. Thus, if two accounts simultaneously have a total balance of more than $ 10,000, reports should be reported for both accounts.
For example, if one owner owns $ 4000 in Cardano (ADA) and the other has $ 7000 in Bitcoin (BTC) on a non-U.S. Exchange, both holdings can be listed since their total is greater than $ 10,000. Therefore, owners of cryptocurrencies should closely monitor the market value of their cryptocurrencies throughout the year in an unstable market. What equals $ 5,000 today could quickly cross the $ 10,000 threshold.
Fines and lack of information
Refusing to disclose the reporting account is stupid. FBAR fines are stiff. For “unintended” errors when submitting FBAR, the penalty is $ 10,000 per error. Courts are currently pouring in about $ 10,000 in bills annually or just for late FBAR.
The tax authorities, as expected, have the same view. If the penalty is $ 10,000 per account per year, it is easy to see how FBAR penalties can easily exceed the actual balance of the accounts themselves. This means that the taxpayer can pay more FBAR fines than the bills. And for “intentional” non-compliance – fines for bad faith. They impose civil penalties for intentional failure to provide FBAR up to $ 100,000 or 50% of the account balance at the time of the breach. Deliberate violations include both nondisclosure and recklessness.
Another condition is due to possible changes in the FBAR rules. At the bottom of Form B of Form 1040 are a series of questions regarding foreign bank accounts. Presumably, if cryptocurrencies are subject to the new FBAR rules, the taxpayer who reports FBAR will also have to answer Plan B questions in the affirmative. A negative response is not the best option. Answering “no” incorrectly to the questions about foreign bank accounts in Appendix B is considered “intentional” behavior in the eyes of the tax authorities.
Most importantly, unlike the FBAR rules, there is no limit to the value of the account with questions from Appendix B. Information about a voluntary foreign bank account begins and does not end with an annual FBAR deposit. If possible, the taxpayer should also honestly answer the questions regarding foreign bank accounts in Appendix B.
Unfortunately, the work doesn’t end there. If cryptocurrencies are considered reportable accounts under FBAR rules, they will be reported naturally in accounts under IRS Form 8938. If US taxpayers have a financial interest in certain foreign financial assets and meet certain account balance limits, they must file a form as well. 8938 with a Individual Tax Return Form 1040. Form 8938 is attached to Form 1040. The same foreign bank accounts submitted under the FBAR Rules are now the same account types that can be filed on Form 8938. FBAR information actually flows into Form 8938.