QUICK BACKGROUND ON THE FOREIGN FINANCIAL ACCOUNT REPORTING REQUIREMENTS IN THE UNITED STATES
Many people are not familiar with FinCen Form 114 which is used by United States taxpayers to disclose on their tax returns any foreign financial accounts that cumulatively exceeded $10,000 at any time during the year. This form is not used to assess additional tax as it is just informational but failure to comply with these requirements may subject taxpayers to HUGE penalties.
Penalties related to the non-willful failure to file the FinCen Form 114 described above could be a much as $10,000! This is a steep penalty for not filing a informational form!
If you think the penalties related to the non-willful failure to file the form are bad if you are found to have willfully not filed the form the penalties can become exponentially worse! Willful failures to file the FinCen 114 can be up to the greater of $100,000 or 50% of the account balance not disclosed! These penalties are crazy! There are also criminal penalties that may be pursued depending on the circumstances.
MORAL OF THE STORY IS THAT YOU SHOULD MAKE SURE THAT YOU ARE IN COMPLIANCE WITH ALL REPORTING OF FOREIGN FINANCIAL ACCOUNTS!
NOW ON TO THE TOPIC OF THIS ARTICLE - ASSETS HELD ON FOREIGN CRYPTO EXCHANGES
What are the requirements related to Cryptos held on foreign exchanges or in wallets located in a foreign country? Can holding Crypto on exchanges that operate in foreign countries (Ex. Binance) require you to file the FinCen 114?
As you can see from the potential penalties discussed above knowing the answer to this question should be very important to Crypto investors that have large balances on overseas exchanges and wallets.
The answer unfortunately is not clear as there is lack of guidance from the Internal Revenue Service (IRS) on this topic. The IRS has come out with guidance that indicates that the position of the IRS is that Crypto is "property" not "currency" for tax purposes. Now foreign property would not be required to be reported on the FincCen 114 but the fact that the Crypto or "property" is actually held on a foreign exchange account or wallet may trigger the requirement to file this form as the FinCen 114 requires that "property" held in foreign accounts be reported if it meets the thresholds.
So what does this mean for Crypto investors with more than $10,000 (at any point in the year) on a foreign exchange or wallet?
Although there is no formal guidance related to this issue the facts would seem to indicate that there could be a possible filing requirement.
Lets take a look at an example of an online poker account. If a US taxpayer holds a balance that triggers the filing requirement for the FinCen 114 they are required to report such account. If you look at this example Crypto held on foreign exchanges look more and more like they may actually trigger a filing requirement for US taxpayers for the FinCen 114.
Further evidence of this point of view can be seen by some foreign exchanges complying with FACTA and disclosing information on some users to the United States government. Since some foreign exchanges are already self reporting the information and identifying themselves (accounts) as foreign financial accounts the IRS would probably take this view as well.
So what does this mean for the Crypto investor that has exceeded the $10,000 threshold in a given year on a foreign Crypto exchange?
EVEN THOUGH THE LAWS ARE NOT CLEAR IT WOULD BE A GOOD IDEA TO JUST FILE THE FINCEN 114 AND DISCLOSE THE CRYPTO ON THE FOREIGN EXCHANGE AS THE PENALTIES FOR NOT COMPLYING CAN BE SEVERE! SINCE THE FORM IS INFORMATIONAL ONLY AND DOES NOT ASSESS ADDITIONAL TAX IT WILL NOT COST YOU A DIME TO DO AND COULD POTENTIALLY SAVE A TON IN PENALTIES IF YOU ARE AUDITED!
There are also many other foreign reporting requirements beyond the scope of this article. Taxpayers with large sums of Crypto located in or on a exchange that operates in a foreign country should ensure that they obtain the proper knowledge and contact an expert in these matters.
As the April 5th deadline is approaching now would be the time to think about these issues if they apply to you as a Crypto investor! Being proactive is always better than staring down the long barrel of the IRS's gun!
This article is for informational purposes only and is not legal, tax, financial or investment advice. Please consult your own adviser as the tax laws are complex and vary based on individual facts and circumstances.