By:  Michael J. Tedesco

With the rapid rise of virtual currency, the IRS and Financial Crimes Enforcement Network (FinCEN) were required to make quick decisions on interpretations of how these virtual currencies should be treated. FinCEN, the agency under the U.S. Treasury Department tasked with administering the Foreign Bank Account Reporting (“FBAR”) requirements, has previously indicated that virtual currencies are not reportable on an FBAR form. Based on the definitions of a foreign account, written before virtual currency became common, an account solely holding virtual currency would not be reportable on the FBAR.

However, that is now about to change. FinCEN related Notice 2020-2 on December 30, 2020 indicating that it would be proposing revisions to the regulations that define a reportable account as including one that holds only virtual currency. These changes, when implemented, will create significant reporting issues for those holding virtual currency in “wallets” located outside the United States. Traditional banks have physical locations and are allowed to operate in the financial services industry under the laws of certain countries. Historically, this has made determining whether an account is domestic or foreign relatively easy. Since virtual currencies exist only in electronic format, taxpayers will need to determine where those assets are held. Infamous and now bankrupt virtual currency exchange Mt. Gox was based in Japan.  Presumably an exchange such as this would be reportable on an FBAR under any new definition of a reportable account. The nature of virtual currencies and the ease of movement of virtual currency will present significant difficulties for FinCEN in proposing an effective definition to cover these types of assets and difficulties for taxpayers determining whether or not a particular account is reportable.

Now more than ever, taxpayers with virtual currency holdings should seek professional tax advice to determine how such assets may be taxed and what, if any, information reporting may be required. The attorneys at Andreozzi Bluestein LLP have extensive experience with crypto and virtual currency and taxation matters, as well as detailed knowledge of FBAR reporting requirements. Should you have a client that is experiencing confusion over the compliance requirements related to virtual currencies or any other tax controversy matter, please contact us anytime for a no-obligation consultation.