A lot of my clients have invested in Bitcoins. For those who aren’t aware Bitcoins are a “cryptocurrency.” For tax purposes, Bitcoins are treated like stocks and bonds; realized gains (and losses) are reported on Schedule D. And that’s everything you need to know, right? Definitely not.
Most holders of Bitcoins use a Bitcoin wallet such as Coinbase or Blockchain. A wallet is used like a brokerage account. That means if you have a foreign Bitcoin wallet, you may have an FBAR reporting requirement.
Coinbase is located in San Francisco; it’s not a foreign financial firm. However, Blockchain is based in Luxembourg. Any American who is using Blockchain who has a tax filing requirement must note they have a foreign financial account on Question 7a. And such an individual may have to file an FBAR (Report of Foreign Bank and Financial Accounts, Form 114) to note this account (if they have $10,000 or more aggregate at any time during 2016). Additionally, it’s also possible such and individual will need to file Form 8938 with their tax return.
I suspect that many holders of Bitcoins and other cryptocurrencies are unaware of this issue. Many Bitcoin holders use multiple wallets and never look at the location of the wallet. Also, many individuals deliberately choose a wallet outside of the US to avoid possible scrutiny. Given that FBAR penalties can be ridiculously high this is an issue that tax professionals and taxpayers need to be concerned about.
While I have used Bitcoin wallet Blockchain as an example, there are many such wallets located outside the United States. I will begin to include such wallets in my list of offshore gambling sites (I’ll probably split the lists next year).