Digital assets and FBAR reporting are definitely on the horizon but as yet, have not arrived.
With the various announcements by the Internal Revenue Service (IRS) that focus on the proper tax reporting for digital assets, as well as delaying implementation of third party broker reporting, it makes total sense that the Financial Crimes Enforcement Network (FinCEN) will soon require that foreign accounts holding virtual currency (and perhaps all kinds of digital assets) must be disclosed on the Report of Foreign Bank and Financial Accounts (FBAR, Form 114). In 2020, FinCEN had already announced in FinCEN Notice 2020-2, the agency’s intention to propose amendments to the FBAR regulations to include foreign accounts that hold virtual currency. We are still waiting for the amendments.
I suspect the amendments have not yet been issued because FinCEN is monitoring various changes occurring in the digital asset universe generally and is considering what should be done with these developments for FBAR purposes. As noted in my earlier blog post, the IRS has now updated a question on its 2022 tax year Form 1040 tax form series by broadening language from “virtual currency” to “digital assets”. Surely, FinCEN is also looking at this issue!
Americans Abroad
When the FBAR change does come making clear that virtual currency foreign account reporting is required, it will likely impact many Americans who live overseas. Numerous Americans living and working abroad have found it difficult to maintain a bank account in their country of residence due to the infamous “Foreign Account Tax Compliance Act”, FATCA. The expat abroad may more frequently turn to virtual currency to handle payments as more and more goods and service providers are now quite happy to accept it. If the virtual currency is held in a “foreign” account, reporting on FBAR will be required assuming the general threshold requirement is met. Remember, the issue for FBAR is not the fact that the taxpayer holds virtual currency (or, more broadly perhaps, digital assets), but rather that the virtual currency is held in a foreign “financial account”.
Digital Asset Held in a Foreign Financial Account?
Per the FBAR instructions, “[a] financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).”
The term “financial institution” is not defined in the instructions. Why? Good question. One can examine 31 U.S.C. 5314 and U.S.C. 5312(a)(1) for guidance, although to be honest, it’s almost as clear as mud. Under those sections, the requirement to file FBAR extends very broadly and we will await FinCEN’s pronouncements in this area when it comes to digital assets. For example, FBAR filing is implicated when the US person “makes a transaction or maintains a relation for any person with a foreign financial agency”. For this purpose, foreign financial agency means ‘‘a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.’’ Additionally, a financial institution includes “any other business designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters.”
A “foreign” financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.
Location of Account
Assuming regulations are issued by FinCEN with respect to virtual currency (or perhaps more widely, digital asset) accounts, these regulations should provide guidance as to the “location” of the account. For example, virtual currency exchanges are based both inside and outside the United States. Certainly, a relevant question would be where the virtual currency exchange is based. Bitfinex, for example, is a cryptocurrency exchange owned and operated by iFinex Inc., which is headquartered in Hong Kong and registered in the British Virgin Islands. By contrast, Coinbase, Binance and Kraken are US-based cryptocurrency exchanges. However, even US-based exchanges may have servers located abroad and as a result, it may not be possible for an account holder to know where his virtual currency is being held by an exchange.
Resources
Want more information? I have an entire blog post category that deals with Virtual Currency / Blockchain Digital Assets. Mine it….Dig in.
Posted February 23, 2023
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