Archive for the ‘Cryptocurrencies’ Category

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Clarity on Whether Cryptocurrency Must be Reported on the FBAR

Thursday, January 7th, 2021

A vexing question has been whether or not foreign cryptocurrency exchanges must be reported on the FBAR. At a conference in 2019, a representative from FINCEN said no; however, the instructions on the FBAR imply they should be reported.

At the very end of December, FINCEN issued Notice 2020-2:

Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

So today a foreign cryptocurrency exchange that has solely cryptocurrency does not have to be reported on the FBAR. However, let’s say you use HypotheticalForeignCrypto.com, and you had any ‘cash’ balance of any fiat currency in your account during the year and you otherwise meet the FBAR filing requirements; that account would have to be reported.

Additionally, this does not change the FATCA (Form 8938) reporting rules. For purposes of IRS Form 8938, a foreign cryptocurrency exchange still must be reported.

Finally, it’s clear from the notice that FINCEN will soon be issuing a regulation that states that a foreign cryptocurrency exchange must be reported. That likely won’t impact 2020 FBARs but will probably impact 2021 FBARs (filed in 2022).

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Posted in Cryptocurrencies, FINCEN, International | Comments Closed

No, You Weren’t Allowed to Do a Like-Kind Exchange for Cryptocurrency Before 2018

Thursday, November 14th, 2019

A question that has come up is whether you could do a like-kind exchange for cryptocurrency prior to 2018. (The Tax Cuts and Jobs Act eliminated all like-kind exchanges for everything except real property beginning with the 2018 tax year.) Tax professionals offered varying opinions; I wrote in September 2017 that it was unlikely the IRS would allow like-kind exchanges for cryptocurrency.

Yesterday, Suzanne Sinno, an IRS attorney in the Office of the Associate Chief Counsel, spoke to the American Institute of CPAs (AICPA). According to an article in Bloomberg Tax, she stated that the IRS’s position is that like-kind exchanges were not applicable to cryptocurrency.

Note that this is just the IRS’s position. It may be that courts could rule that like-kind exchanges do apply to cryptocurrency. Additionally, this is informal (unpublished) guidance. That said, the IRS’s position on this shouldn’t be a surprise.

So let’s assume you converted one crypto to another back in 2016 or 2017, and you treated it as a like-kind exchange. What should you do? You should discuss this with your tax professional. The answer to your specific situation will depend on your facts and circumstances.

While the IRS is increasing enforcement vis-a-vis cryptocurrency, the agency today is primarily looking for individuals who haven’t reported their transactions. As I’ve told many clients, there’s likely someone in Dubuque (or Des Plaines or Denver or wherever) who made $2 million (or more) trading cryptocurrency and hasn’t reported any of his or her gains. That’s low-hanging fruit for an IRS examination, and those individuals should consult a tax professional (or potentially a tax attorney) immediately. There’s a huge difference between an individual who ignored reporting cryptocurrency and an individual who made good faith efforts to accurately report his income.

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Posted in Cryptocurrencies | Comments Closed

“[D]id you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Wednesday, October 23rd, 2019

I haven’t posted that much this year for a few reasons. I’ve had some family issues (and that takes priority over just about everything), and this was a difficult tax season. Now that Tax Season is over, I’m going to be increasing my posting. The next few posts are all going to be looking at cryptocurrency (what the IRS calls “virtual currency”) because there’s been a lot of activity in this area over the past few weeks.

Today, we’re looking at an upcoming issue. During the second half of each year, the IRS releases draft tax forms for the following tax season. The IRS gets industry comments, and it also alerts both software makers and tax professionals of upcoming items. Here’s the top of the draft Schedule 1 for 2019:

CryptoQuestion

The question reads, in full, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

The IRS thinks that some taxpayers just might not be telling the truth about cryptocurrency. This question means that if you own any cryptocurrency and had any transactions in 2019, you need to check a box. It’s similar to the boxes on the bottom of Schedule B asking about foreign financial accounts.

Tax returns are filed under penalty of perjury. Thus, a taxpayer who answers that question “No” when he or she is trading virtual currency would be committing perjury. Indeed, it’s yet another way the IRS is looking into cryptocurrency transactions.

Kelly Erb, who alerted me to this new question, believes the location of the question is poor. I agree. An individual who sells cryptocurrency must complete Schedule D and Form 8949. That individual might not include Schedule 1 on his or her tax return. If you’re looking for improving compliance with the law, the question should be asked where impacted individuals will see it. The IRS will take comments for the next 17 days on the draft form, and I have suggested to the IRS that the question be put on Schedule D rather than Schedule 1. (If you want to comment, you can send an email to WI.1040.Comments@IRS.gov. Note that the IRS does not respond to each comment, but absolutely does look at the comments and considers them before making draft forms final.)

A client was in my office toward the end of September to finalize his 2018 returns. He had a lot of cryptocurrency transactions, but the overall gain or loss was about $100. As we attached a listing of his thousands of trades to his tax return, he asked if I thought someone would be prosecuted over cryptocurrency. I strongly believe that IRS criminal investigation will look at making an example of someone. There’s likely a kid in Dubuque or Dallas or Denver who made $3 million in cryptocurrency and thinks it’s “free money.” It’s not–accessions to wealth are, by definition, income and all income not exempted by Congress is subject to income tax. As always, it’s a whole lot easier to simply pay your tax than not do so.

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

Monday, August 5th, 2019

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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Posted in Cryptocurrencies, FINCEN | Comments Closed

IRS Sending Letters Based on Coinbase Summons

Friday, July 26th, 2019

In 2017 the IRS won its fight with Coinbase, and received information from that cryptocurrency exchange on customers who traded cryptocurrency. Today, the IRS announced that they’re sending letters to individuals who may need to file or amend their returns to report cryptocurrency transactions.

The IRS notice states:

The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.

Two of my clients received Letter 6174-A today. They had both included their cryptocurrency sales on their tax returns for all years, so they can ignore the letter. My suspicion is that Letter 6174-A is sent to taxpayers the IRS believes are in compliance.

The more serious letter is Letter 6173. This letter states, “For one or more of tax years 2013 through 2017, we haven’t received either a federal income tax return or an applicable form or schedule reporting your virtual currency transactions.” That’s potential trouble for recipients. If you receive (or received) Letter 6173, you should consult a tax professional immediately. This letter requires a response, and it means the IRS thinks you’ve erred on your taxes. Having said that, remember that it’s entirely possible you did include your cryptocurrency transactions on your return and the IRS simply erred.

I should point out that it’s my conclusion that these letters are the result of the Coinbase summons. The IRS notice states only they used “data analytics” and that “[t]he names of these taxpayers were obtained through various ongoing IRS compliance efforts.” It could be something else, but I’m not aware of any other ongoing compliance efforts related to cryptocurrency.

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Online Gambling and Offshore Cryptocurrency Exchange Mailing Addresses for 2019

Tuesday, February 5th, 2019

This list has been superceded by the 2020 list.

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year. (The IRS and FINCEN now allege that foreign online poker accounts are “casino” accounts that must be reported as foreign financial accounts. The rule of thumb, when in doubt report, applies—especially given the extreme penalties.) You also should consider filing an FBAR if you have $10,000 or more in a non-US Cryptocurrency Exchange.

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

I have made major updates on this list for 2019. Many, many addresses have changed. We went through the complete database and attempted to find new addresses for each entry.

FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited
Douglas Bay Complex, King Edward Rd
Onchan, IM31DZ Isle of Man

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

Finally, I no longer have an address for Bodog. If anyone has a current mailing address, please leave it in the comments or email me with it.

Note: This list is presented for informational purposes only. It is believed accurate as of February 5, 2019. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

If anyone has additions or corrections to the list feel free to email them to me.

Posted in Cryptocurrencies, FINCEN, Gambling | Comments Closed

The Deep State and Cryptocurrency

Thursday, May 17th, 2018

There have been plenty of articles about the “Deep State” vis-a-vis President Trump. I’m not going into that; if you’re interested, Google is your friend. Rather, I’m going to look at the Deep State and cryptocurrency.

On May 1st the Wall Street Journal published an article titled, “World’s Second Most Valuable Cryptocurrency Under Regulatory Scrutiny” [pay link]. In the article, the Journal discusses possible regulatory action against Ether:

Bitcoin has largely escaped government oversight, but regulators are examining whether other widely traded cryptocurrencies should be regulated as securities, according to people familiar with the matter.

And today I received an email from the Securities and Exchange Commission (SEC):

If you’ve ever been tempted to buy into a hot investment opportunity linked with luxury travel, the Securities and Exchange Commission has a deal for you.

Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic—because the offer isn’t real.

The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on “Buy Coins Now” will be led instead to investor education tools and tips from the SEC and other financial regulators.

“The rapid growth of the ‘ICO’ market, and its widespread promotion as a new investment opportunity, has provided fertile ground for bad actors to take advantage of our Main Street investors,” said SEC Chairman Jay Clayton. “We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud. Distributed ledger technology can add efficiency to the capital raising process, but promoters and issuers need to make sure they follow the securities laws. I encourage investors to do their diligence and ask questions.”

The website features several of the enticements that are common to fraudulent offerings, including a white paper with a complex yet vague explanation of the investment opportunity, promises of guaranteed returns, and a countdown clock that shows time is quickly running out on the deal of a lifetime.

As poker players know from “Black Friday,” regulators believe that which is not clearly legal is illegal. And regulators make up the deep state, and have made it quite clear what’s coming on the horizon. The regulators are going to act.

Are there legitimate ICOs? Of course, but given what regulators view as rampant fraud and abuse in cryptocurrency, the regulators are going to act. The Journal has this quote:

Peter Van Valkenburgh, director of research at Coin Center, said declaring ether a security “would make a shambles of U.S. innovation policy. It’s going to throw up a lot of barriers that aren’t necessarily sensible.”

Mr. Van Valkenburgh may be right, but there’s no doubt in my mind that’s the direction regulators want to, and will likely, go.

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Bozo Tax Tip #1: Ignore Cryptocurrency Sales!

Friday, April 13th, 2018

Last week (as I write this), I met with a new client. He purchased a lot of cryptocurrency in 2016 but didn’t sell any of it until around Thanksgiving of 2017 (he had one small sale). He asked me if he had to report it; I told him he definitely did: I haven’t found anything in the Tax Code that exempts cryptocurrency from US taxation. We entered it, and the gain was duly noted on his return. He then asked me about his other purchases of cryptocurrency. He had heard about Coinbase complying with a summons (indeed, he received notification about this from Coinbase) and wondered about that. I told him there was nothing he need do about his purchases. The IRS ruled that cryptocurrency is property, so only disposals of cryptocurrency need be noted on tax returns. Your records may be going to the IRS, but there’s nothing you need to do about it or anything to worry about.

Contrast that with a different individual; let’s call him John. I met with John last week. Our Engagement Letter now specifically notes that cryptocurrency transactions must be included on tax returns. John said he had over 3,000 transactions of swapping various cryptocurrencies and, “There’s no way in hell I’m going to tell the IRS about them.” I told him it was nice meeting him, and he would need to find another tax professional to prepare his return because there’s no way in hell I’m going to be an accomplice to tax evasion.

I’m not enamored by the IRS’s decision to tax cryptocurrency as property rather than currency. If cryptocurrency were taxed as currency, calculating gains would be simple and straightforward. True, for some individuals who have bought a single cryptocurrency and have few trades, cryptocurrency taxation isn’t a big deal. However, we are dealing with lots of clients with huge trading volumes. And then we have the forks, airdrops, and who knows what else.

The IRS is looking for help in how to tax a fork. Is the correct analogy a stock split? Or do we have a stock dividend? Peter Reilly argues that the best course for individuals in this situation is to file an extension and hope that the IRS issues guidance by late summer. Unfortunately, no one knows when the IRS will issue guidance.

But there is one certainty: Ignoring your cryptocurrency realized gains is a bad idea. The IRS issued a reminder about this. An excerpt:

The Internal Revenue Service today reminded taxpayers that income from virtual currency transactions is reportable on their income tax returns.

Virtual currency transactions are taxable by law just like transactions in any other property. The IRS has issued guidance in IRS Notice 2014-21 for use by taxpayers and their return preparers that addresses transactions in virtual currency, also known as digital currency.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.

In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.

So if you’re a Bozo, just ignore that million you made selling Bitcoin. They’ll never catch you…you hope.

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Posted in Cryptocurrencies | Comments Closed

SEC Reportedly Launches Cryptocurrency Probe on ICOs

Wednesday, February 28th, 2018

The Wall Street Journal is reporting (pay link) that the Securities and Exchange Commission (SEC) has issued “scores of subpoenas and information requests” regarding digital tokens (aka Initial Coin Offerings, or ICOs).

That regulators are starting to look into this market shoudn’t come as a surprise. The US government doesn’t move fast, but regulators have been giving messages regarding ICOs (and they’ve generally been, “You need to comply with securities laws”) for some time.

As someone involved in the poker industry before “Black Friday”, this has all the signs of a repeat performance (except in the world of cryptocurrency rather than online gambling). Before Black Friday US government officials said that online gambling was generally illegal (to be offered). The SEC sent a release in August 2017 on ICOs; the implication was that some involved market manipulation and other illegal activity. The Commodities Futures Trading Commission (CFTC) has also sent a release. And the chairs of the SEC and CFTC wrote an op-ed in the Wall Street Journal in January. An excerpt:

Market participants, including lawyers, trading venues and financial services firms, should be aware that we are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections…The CFTC and SEC, along with other federal and state regulators and criminal authorities, will continue to work together to bring transparency and integrity to these markets and, importantly, to deter and prosecute fraud and abuse…Distributed ledger technology may in fact be the next great disruptive and productivity-enhancing economic development. If history is any guide, DLT is likely to be followed by many more life-changing innovations. But we will not allow it or any other advancement to disrupt our commitment to fair and sound markets.

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Coinbase To Comply With IRS Summons

Saturday, February 24th, 2018

Two of my clients received an email from Coinbase:

Dear Mr. Smith,
In December 2016, the Internal Revenue Service issued a summons demanding that Coinbase produce a wide range of records relating to approximately 500,000 Coinbase customers. Coinbase fought this summons in court in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government. After a long process, the court issued an order that represents a partial, but still significant, victory for Coinbase and its customers: the order requires Coinbase to produce only certain limited categories of information from the accounts of approximately 13,000 customers. We are writing to let you know that the above-described court order requires us to produce information specific to your account. If you have concerns about this, we encourage you to seek legal advice from an attorney promptly. Coinbase expects to produce the information covered by the court’s order within 21 days. For your reference, the court’s judgment can be found here. The case was filed in the United States District Court for the Northern District of California, Case No. 17-cv-01431-JSC. In addition, we also want you to know that because Coinbase received a summons on December 8, 2016, and more than six months passed before our challenges to the summons were resolved by the court, the period of limitations under sections 6501 and 6531 of the Internal Revenue Code (title 26 of the U.S. Code) were suspended beginning as of June 8, 2017 and continuing through the final resolution of Coinbase’s response to the summons. This may be relevant to the tax returns that you have filed for the 2013, 2014, and 2015 calendar years. If you have questions about your tax liability for those years, we strongly encourage you to consult with your tax advisor.
Regards, The Coinbase Team

Let me clear up a few points made by Coinbase:

1. This is not a significant victory for Coinbase. As most tax professionals thought, Coinbase must comply with US law and comply with most of the IRS summons.

2. The statute of limitations for impacted taxpayers was extended for about nine months by the battle over the summons. Coinbase is absolutely correct about this. Where this gets important for individuals who may not have included all of their Coinbase transactions on their returns is if they substantially underreported their income. Timely filed 2013 tax returns are “beyond the statute date,” even including the extra nine months. (They were due in April 2014, so adding an extra nine months takes to the normal three year statute of limitations takes us to January 2018.) However, timely filed 2014 returns impacted by this will have an extra nine months added to the statute date (until January 2019).

Additionally, anyone who substantially understated their income (20% or more) has a six-year statute length rather than three years. Timely filed 2013 returns are well within the extended statute length.

3. Coinbase’s suggestion of consulting with your tax advisor is an excellent one. If you file an amended return before the IRS comes after you or has knowledge of your error, you generally are looking at just paying tax and interest. Coinbase has told those impacted by this that you have less than 21 days to correct your mistakes; take advantage of that now!

If you included your cryptocurrency transactions on your tax returns, you’re likely not going to be a target. But if you didn’t, you have been given a short period of time to file amended tax returns.

Finally, this is not the end of this issue; expect the IRS to send summonses to all the other US-based Exchanges. I would not be surprised if the IRS targets foreign Exchanges that service Americans. This is a black and white issue under US tax law: Any accession to wealth not exempted from taxation under the law results in taxable income. Cryptocurrency gains are not exempt from taxation under US law.

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Posted in Cryptocurrencies | Comments Closed

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