Does an Individual Holding Cryptocurrencies on a Foreign Exchange Have a Legal Obligation to Disclose that Interest on an FBAR or Form 8938

By Anthony Diosdi

“U.S. persons” have a legal duty to file an FBAR (FinCEN Form 114, previously known as Form TD F 90-22.1) to disclose an interest in a foreign financial account if the “aggregate value” of the account(s) exceeds $10,000 “at any time during the calendar year.” A “U.S.” person means a U.S. citizen, U.S. resident (green card holder or an alien residing in the United States), corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.  

The definition of “financial account” in a foreign country can be difficult to understand. For FBAR reporting purposes, a “financial account” that must be disclosed on an FBAR includes the following:

1) securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution.

2) 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), pension fund or retirement accounts, an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.

In general, an individual has a “financial interest” and thus an FBAR reporting requirement if he or she is the owner of record or if the holder of the foreign account is a person acting as an agent, nominee, attorney, or otherwise a person acting on behalf of a U.S. person with respect to the foreign account. These reporting requirements do properly address whether or not the holder of cryptocurrencies on a foreign cryptocurrency exchange (e.g., Xap.com or Binance.com) or a foreign wallet service provider (e.g., Blckchain.com) is required to report these account(s) on an FBAR. This is because the government is having difficulty defining cryptocurrency.

The Internal Revenue Service (“IRS”) defines cryptocurrency as “property.” On the other hand, the Securities Exchange Commission’s (“SEC”) classifies cryptocurrency, in certain circumstances, as a “security.” Finally, the Commodity Futures Trading Commission’s (“CFTC”) has stated that cryptocurrency is a “commodity.” This tension between various government agencies is problem when determining whether or not to disclose foreign cryptocurrency on an FBAR. As discussed above, the IRS defines cryptocurrency as “property.” If cryptocurrency, in particular foreign cryptocurrency, is defined as property, it is not necessary to disclose it on an FBAR. However, if foreign cryptocurrency can be classified as a “security” or a “commodity,” the cryptocurrency must be disclosed on an FBAR.

Even if cryptocurrency held on a foreign exchange can be classified as “property,” it does not mean the cryptocurrency will not need to be disclosed on an FBAR. That depends on the method the cryptocurrency is held. If the cryptocurrency is maintained by a foreign wallet service provider, the foreign wallet service provider could be classified as a foreign financial institution for FBAR reporting purposes. This type of arrangement could trigger an FBAR reporting requirement. Under the current IRS definition of digital currency, cryptocurrency that is held directly by a U.S. person will not likely result in an FBAR reporting requirement. However, as discussed above, cryptocurrency held through a foreign wallet service provider may result in FBAR reporting requirement.

Foreign Cryptocurrency and Form 8939

Although U.S. persons that hold foreign cryptocurrency may not have an obligation to disclose the cryptocurrency on an FBAR, U.S. persons holding foreign cryptocurrency may have an obligation to disclose the cryptocurrency on a Form 8938. As a general background, U.S. persons with an interest in a “specified foreign financial asset” during a taxable year must attach to their tax returns a Form 8938 if the aggregate value of all such assets is greater than $50,000. The following are examples of specified foreign financial assets:

1) Financial accounts held at foreign financial institutions.

2) Foreign stock or securities held in a financial account at a foreign financial institution.

3) Foreign stocks or securties.

4) Foreign mutual funds.

5) Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust.

6) Foreign issued life insurance or annuity contract with a cash value.

7) Foreign hedge funds and foreign private equity funds.

U.S. persons must report “specified financial assets” on Form 8938 with their annual income tax returns. See IRC Section 6038D and Treas. Reg. Section 1.6038D-0. The financial assets that must be reported on Form 8938 are broader than what is required to be reported on an FBAR, and include other categories, “any financial account…maintained by a foreign financial institution” and “any interest in a foreign entity.” See Instructions for Form 8938, Parts I and V, https:www.irs.gov/pub/irs-pdf/i8938. Under these rules, a U.S. person who holds cryptocurrencies on a foreign exchange and/or a U.S. person that holds cryptocurrencies in an offshore wallet may be required to report the cryptocurrencies on Form 8938.

Diosdi Ching & Liu, LLP represents clients in a wide variety of international tax planning and tax controversy cases.

Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi represents clients in federal tax controversy matters and federal white-collar criminal defense throughout the United States. Anthony Diosdi may be reached at 415.318.3990 or by email: adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.