Offshore Cryptocurrency Reporting

Cryptocurrency, including such online currencies like Bitcoin or other “virtual” currencies, are posing their own unique challenges to the Internal Revenue Service (IRS) and U.S. taxpayers. According to a CNBC report, “Almost every bitcoin or other ‘altcoin’ transaction – mining, spending, trading, exchanging, air drops, etc. – will likely be a taxable event…” Although both the public and the crypto community refer to bitcoin and altcoins as virtual currencies, the IRS treats them as property for tax purposes. Spending, selling or exchanging cryptocurrency for other tokens have capital gain implications, while receiving cryptocurrency as compensation or by other means can be considered taxable as ordinary income. Your tax professional should be advising you accordingly. What may not be so obvious is the tax treatment of cryptocurrency that is stored offshore. Many American cryptocurrency users rely on non-U.S. exchanges for either Bitcoin and other altcoins. This is not immune from reporting requirements. Any money held abroad must be disclosed to the IRS and the US Treasury. As soon as you store over $10,000 worth of cryptocurrency abroad – in any form – it must be disclosed through a Report of Foreign Bank and Financial Accounts (FBAR). Anyone failing to do so will face a hefty fine and a potential jail sentence as well. Some may argue that cryptocurrency is a commodity, like gold or silver, or even a security. Although these points are still open for debate, it remains that precious commodities held by foreign agencies and securities traded in overseas exchanges must also be reported through FBAR. Keep in mind that the $10,000 FBAR reporting threshold applies if you reach that level of overseas assets at any time during a tax year, not just at year’s end. Plus, cryptocurrency and other assets are added together for purposes of meeting the $10,000 threshold to trigger FBAR reporting. If your cryptocurrency accounts are held in U.S.-based exchanges, they are not foreign and FBAR reporting should not be required. But all other tax obligations apply to the income, gains, and losses on your “virtual” currency account. Cryptocurrency is still a murky and emerging part of the global economy. Tax authorities are still working through definitions and how they will apply existing tax laws to the virtual currency world. But rest assured that it is to your benefit to be open and up front in reporting your cryptocurrency holdings. For more on this and other tax topics, please contact our Tax Department at (781) 407-0300.

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