Bitcoins are one example of a new form of currency referred to as cryptocurrency, digital currency or virtual currency. It is a type of currency purchased and exchanged online. Users may wonder whether or not their actions with these types of digital assets are in compliance with United States tax laws. Unfortunately, the Internal Revenue Service (IRS) has yet to provide any definitive guidelines. The federal agency was recently chastised by Congress for a lack of clarity and called to put together "additional guidance on the tax consequences and basic tax reporting requirements" for those who use cryptocurrency.
One specific question that the IRS will likely answer once it provides this additional guidance is whether or not bitcoin users should file an FBAR.
What is an FBAR? The Report of Foreign Bank and Financial Accounts (FBAR) is a required document for those who have certain foreign financial assets. Those who are accused of failing to complete this form can face monetary penalties and, depending on the details of the foreign accounts, potential criminal charges. This document is used to help ensure that all foreign assets are accounted for and that all tax obligations are met.
When does a bitcoin qualify for an FBAR? In theory, any bitcoin that is held in a foreign account could qualify for a required FBAR if other requirements are also met. These requirements generally include that a United States person report any foreign financial interest over a certain amount.
A report published in The Contemporary Tax Journal notes that one potential precedent case for the use of tax laws on digital currency deals with poker winnings. The case, U.S. v. John C. Hom, involves the use of online gambling sites. The sites used actual, deposited money and were located outside of the United States. The individual holding the accounts in question had a balance of over $10,000, triggering the FBAR requirement in 2006 and 2007. Ultimately, the court found that the poker company met the definition of a financial institution and that an FBAR was required.
If online poker sites can qualify for FBAR requirements, it is likely cryptocurrency will also qualify. Although there does not appear to currently be a black and white, yes or no answer to whether or not bitcoin users should file an FBAR, it is likely that in the near future this will become a requirement for qualifying accounts.
This issue is just one of the many complex legal tax matters investors must navigate to ensure they are in compliance with tax laws. A failure to comply can result in serious repercussions, ranging from monetary penalties to potential imprisonment depending on the offense. As a result, it is wise for investors that may have foreign interests to seek the legal counsel of an experienced tax attorney.