Turns out there’s no FBAR mandate on your offshore bitcoin account. Is the government making a tactical retreat in its war on money launderers and tax cheats?
In response to a request for guidance from an accountants’ group, the Treasury Financial Crimes Enforcement Network has recently decreed that cryptocurrency accounts held by exchanges located outside the country don’t have to be disclosed.
That means you don’t have to confess your Binance assets on the Foreign Bank and Financial Accounts Report, alias FBAR. The report, which is filed on a form called Fincen 114, is required when a taxpayer’s financial assets (cash and securities) held in foreign institutions top $10,000.
Why the leniency? Mostly because the antiquated laws aimed at financial mischief simply can’t cope with crypto.
A rational observer would say that bitcoin, which is both a store of value and a medium of exchange, is money. But the IRS, enforcing legislation written in a pre-internet age, has concluded that cryptocurrencies are “property”—more like Picassos than pesos.
At some point the tax police will get up to speed. They’ll rewrite rules or get legislation including digital assets in the offshore reporting scheme. But they’ll still have a hard time ferreting out hidden wealth. Cryptocurrencies, already somewhat anonymous, are getting more so. There are tumblers that erase bitcoin trails and there are newer currencies designed to offer enhanced privacy.
To investors, crypto is an asset class that might warrant an allocation in a portfolio. Although cryptocurrencies are volatile, they have the virtue of being not very correlated to stocks and bonds that fall, directly or indirectly, under the spell of central banks.
To enforcers, crypto is nothing but trouble. Bitcoin was the common currency of Silk Road, that bazaar of contraband whose manager got a life sentence. Russian hackers used bitcoin in their election meddling. A press release in May from Immigration & Customs Enforcement, crowing about the indictment of an alleged fentanyl vendor, gives bitcoin a prominent mention.
Donald Trump doesn’t like crypto. His Treasury secretary, Steven Mnuchin, complained recently that cryptocurrencies are being used illicitly. He vowed to produce regulations to keep them from turning into a new form of numbered Swiss bank account.
But aren’t bitcoins by their nature numbered accounts? The blockchain—a record of all transactions to date—is a string of integers, with no holders’ names attached. Still, holders can get nailed for doing something wrong.
Chain analysis software traces the history of a bitcoin as it moves from account to account. If at any point that coin passed through an exchange subject to U.S. know-your-customer rules (like Coinbase), the cops can get the name and taxpayer ID of someone who used the coin. That may give them a wedge, via subpoena or a threat of prosecution, to identify other participants in the chain of ownership.
And then there are users who make mistakes. Evidently the fellow accused of selling fentanyl wanted to convert bitcoins to dollars, and in the process of doing that transferred the coins to addresses that were controlled by federal agents. This is reminiscent of the bank robber who hops into what he thinks is a getaway car but turns out to be a police vehicle.
Cryptocurrency users who want their activities to be more cryptic have options. They can use one of the tumbler services that take in possibly dirty coins and replace them with randomly selected coins. They can use Monero or Zcash, currencies explicitly designed to be more private than bitcoin. And how is Secretary Mnuchin going to police Binance, the fast-growing coin repository that hops from jurisdiction to jurisdiction? It is now in Malta, where regulators are proud of their light touch.
Yet another way to keep coins hidden is to keep them in your own wallet instead of in the custody of an exchange. Just don’t lose the key.
Sean Golding, an Irvine, California attorney whose clientele includes global investors, says that you are under no obligation to report coins held in a wallet on your desktop, any more than you are obliged to report gold stored under your bed. You must, though, report and pay tax on profitable sales of either.
What about your account at an offshore exchange? Even with the recent dispensation from the IRS, it might be a good idea to file the FBAR anyway, Golding says. You might, after all, do some trading that temporarily turns bitcoins into dollars or euros. If your total of cash and securities held offshore exceeds $10,000, even for a day, the FBAR is mandatory.
The IRS takes the Fincen 114 form seriously. It’s trying to collect a $4.7 million fine from someone who forgot to fill it out.
Your account at a U.S. exchange needs no FBAR. The IRS can already see the account. Thus, Coinbase customers who neglect to declare gains from crypto sales can expect to hear from the feds.
What about Fatca? The Foreign Account Tax Compliance Act is another disclosure regime, overlapping Fincen but with its own set of rules and different thresholds ($50,000 for a single taxpayer, $100,000 for a joint return filer). Play it safe, advises Golding. The recent guidance on FBAR doesn’t apply here. If you’re at or above the cutoff, file the Fatca report.
The FBAR must be filed electronically with Fincen, a Treasury unit separate from the IRS.