Bitcoin FBAR & FACTA Requirements
There are two separate reporting requirements under federal law for foreign financial accounts, each created by a different statute. These are the “Bank Secrecy Act” and the “Foreign Account Tax Compliance Act.” Although the exact wording is different between the two statutes, they generally require reporting of financial accounts held at foreign financial institutions. Whether bitcoin wallets and exchange accounts fall meet the definitions for these terms is debatable.
Do the reporting requirements apply to bitcoins kept in paper wallets?
Probably not. It’s pretty difficult to imagine that a paper wallet containing your bitcoins would qualify as a “financial account” held at “foreign financial institution”. Thus, it’s fairly safe to assume that paper wallets are not subject to the reporting requirements.
Do the reporting requirements apply to accounts at a foreign bitcoin exchanges (such as Mt. Gox or BTC-e)?
Probably. The answer basically depends on whether foreign bitcoin exchanges are “foreign financial institutions,” and whether an account with one of them is indeed a “financial account.”
Unfortunately, an analysis of the specific meanings of these terms and the myriad of regulations that apply is too large of a task for this article. However, you should know that the definitions for these terms are exceptionally broad and you would have a hard time arguing that foreign bitcoin exchange accounts are not covered by the reporting requirements. After all, they accept deposits of fiat and provide brokerage services, which are traditional characteristics of a financial accounts and financial institutions.
In any case, it’s advisable to err on the side of caution here. As you’ll see below, the penalties for failing to file foreign account disclosures are tremendously harsh, so it’s likely that you’re better off assuming that you should report such accounts (subject to the minimum balance requirements) until told otherwise. At the very least, you should consult with a tax attorney if you have a foreign bitcoin account with a balance higher than the minimum thresholds discussed below. There are many complex strategy considerations here that an attorney can help you navigate.
Do the reporting requirements apply to e-wallet accounts (such as blockchain.info)?
Probably not, although it depends on the nature of your account. The most important factor is whether you give custody of your bitcoins to the e-wallet provider. If you do, then your e-wallet probably qualifies as a “deposit account,” which would bring it within the reporting requirements. Of course, there is still the question of whether the e-wallet provider is a “financial institution,” but given the extremely broad definitions used by the BSA and FACTA, it’s probably fair to assume that any business accepting deposits on behalf of customers is a “financial institution” – even deposits of bitcoins. Therefore, e-wallet accounts that take custody of your bitcoins are likely subject to the reporting requirements.
On the other hand, if you maintain control of the e-wallet and the provider has no access to your bitcoins, then it’s unlikely your e-wallet is a “financial account.” Without a financial account, you cannot be subject to the reporting requirements.
A good test for whether your account is custodial or noncustodial is to check if you are given a personal key for the wallet. Most custodial e-wallets do not provide you with a personal key, meaning that you must request a transfer of your bitcoin, which they then execute. A noncustodial e-wallet, on the other hand, gives you the personal key and you can transfer bitcoins out of the wallet without any interaction with the e-wallet provider. They have no access to your bitcoins and essentially just generate a valid wallet address for you without keeping any control over your account. Therefore, it would be unlikely that they are maintaining an account on your behalf.
Again, though, abundance of caution would be wise here. If your e-wallet account is greater than the minimum thresholds, you should consider talking with a knowledgeable attorney to make sure you are not subject to the reporting requirements.
What is the minimum account balance for reporting the reporting requirements?
Remember there are two separate reporting requirements. The first arises under the Bank Secrecy Act and has a minimum account threshold of $10,000. The test if whether the total aggregate value of all your foreign accounts exceeds $10,000 at any point during the year. If so, you must report the highest balance for each account by filing an FBAR with the IRS. This form is filed separate from your income tax return and must be received by June 30th of each year.
The second filing requirement arises under the Foreign Account Tax Compliance Act (FACTA). This requirement has a minimum threshold of $75,000 during the year, except for the last day of the year when it is lowered to $50,000. Thus, if the aggregate value of your accounts is less than $75,000 during the year, you will still have to report them if their value is greater than $50,000 on December 31st. The reporting is done by filing a Form 8928 with your income tax return. This form reports the highest balance of each account during the year. Note: this is in addition to the FBAR filing.
What is the penalty for failing to file an FBAR?
The penalty for failure to file an FBAR under the Bank Secrecy Act varies depending on “willfulness.” If your failure to file was not willful, the penalty is capped $10,000. If your failure was willful, the penalty is $100,000 or 50% of the highest account balance for each account, whichever is greater. Criminal penalties can also apply.
Willfulness is defined generally as the intentional disregard of a known legal duty. The IRS will typically assert willfulness if you fail to file FBARs in multiple years. Otherwise, the determination will depend on your knowledge, sophistication, and experience as it relates to whether or not you knew of your reporting requirement.
What is the penalty for failing to file a Form 8938?
The penalty for failing to file a Form 8938 with your tax return is an automatic $10,000.00, increased up to $60,000 if you fail to file after receiving notice from the IRS. Criminal penalties may also apply.
At the end of the day, the penalties for both the FBAR and Form 8938 are severe. You should consult with a tax attorney if your bitcoin holdings are greater than the thresholds described above to be sure that you are in compliance with the reporting requirements.