Should You Be Reporting Cryptocurrency Held in a Foreign Exchange on the FBAR and Form 8938?

It’s been assumed that the answer to the question I posed as the title to this post is “Yes”, that you should be reporting cryptocurrency held in foreign cryptocurrency exchanges on the FBAR. However, the AICPA Virtual Currency Task Force asked this question to FINCEN and was surprised to find the answer is no:

FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. This may change in the future, especially considering the influx of stable coins, so practitioners should stay abreast on this topic. FinCEN did tell the task force that it, “in consultation with the IRS, continue[s] to evaluate the value of incorporating virtual currency held offshore into the FBAR regulatory reporting requirements.” Absent this clarity, the conservative approach would be filing the FBAR.

I think the conservative approach is best, and we can look back at the Hom decision at a parallel situation. Years ago, online gambling accounts were reportable. Then FINCEN said to tax professionals, you do not have to report these accounts on the FBAR. However, a court then ruled in United States v Hom that these accounts were reportable. Nothing today prevents the identical situation from occurring with regards to cryptocurrency.

Indeed, let’s say John Smith has $1,000,000 worth of Bitcoin on some foreign cryptocurrency exchange. He doesn’t file the FBAR. He sells his cryptocurrency and the IRS discovers this when no tax return (or FBAR) is received. The matter is referred for criminal prosecution, and not only are charges filed for failing to file a tax return, the Department of Justice adds charges for not filing the FBAR.

There is no penalty for overreporting accounts on the FBAR, just underreporting. Thus, the mantra, “When in doubt, file the FBAR,” definitely applies. I strongly suggest you file the FBAR for foreign cryptocurrency exchanges (assuming you have an FBAR filing requirement).

But what about Form 8938 (Statement of Specified Foreign Financial Assets), the FATCA reporting statement that’s required with certain tax returns? Nothing has changed with regard to this form. Thus, even if you elect not to report your foreign cryptocurrency exchange holdings on the FBAR, you are still required to report them on Form 8938 (assuming you meet the Form 8938 filing threshold).

Again, there’s no penalty for overreporting and lots of penalties for underreporting. The conclusion I draw is the only logical conclusion given the current situation.

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