FBAR & FATCA – what you need to know as a crypto trader

FBAR & FATCA – what you need to know as a crypto trader


Hello everyone. This is Sal from BitcoinTaxes.
Welcome to our podcast. Each week we speak to an expert with knowledge related to cryptocurrency,
taxation, and blockchain technology. Our guests all have a unique perspective or expertise
on these topics. Today we are speaking with Andrew Gordon. Andrew is a tax attorney with
expertise on the often complex intersection of foreign transaction reporting and cryptocurrency.
Andrew, thanks for being here today. Thanks for having me.
No problem. So can you give us a little bit of background about yourself and how you got
started with Crypto? Sure. So again, my name is Andrew Gordon and
I’m actually an attorney and a CPA. But don’t worry, I use these powers for good or I try
to at least. So my background is actually mainly in tax controversies. And so what I
mean by that is we represent people in tax issues with the IRS, so audit, criminal investigations,
they owe the IRS money, whatever it may be. we practice heavily in that area, but we also
do a good deal of compliance as well. Actually several years ago, ago in 2014, we had a client
approach us who was getting paid magic internet money, from the ethereum foundation. And back
then the IRS had not released any guidance and it wasn’t till later in 2014, the IRS
even defined Crypto as property. And so then that was our first introduction and we were
and presented the question of, well, if I’m getting paid these random tokens called ethereum,
how do we account for this? That was our first entrance into the space. And since then we’ve
represented clients in different cryptocurrency matters
2014. That’s good amount of time in the crypto space.
Yeah. And you know, it’s funny because a lot of people still to this day think, oh is crypto
even reportable? In 2014, the IRS even defined crypto is property. So it’s been some time.
Yeah. I mean I’ve mentioned this multiple times on previous podcasts, but there are
always going to be those people that say that you don’t have to pay taxes. And that, you
know, crypto is not about taxation, but the reality is you have to pay taxes on cryptocurrencies.
And you know, that’s not going to change anytime soon. But yeah, today you’re going to talk
to us about something that is a little bit more confusing when it comes to taxation and
that is foreign account reporting. So that would be the FBAR and the FATCA forms. So
can you talk a little bit about what the FBAR and what that FATCA forms are?
Yeah, let’s start there. FBAR is my favorite four letter word. It stands for a foreign
bank account report. This is a form that the Department of Treasury is in charge of but
isn’t actually filed with your tax return. It’s a separate form. It’s filed a law online,
electronically. it has the same due dates as your tax returns. So April 15th and it
can be extended six months to October 15th. So same due dates, but its file differently,
still sent to the Department of Treasury – two separate forms. And in the FBAR form, what
taxpayers have to do is they have to identify the maximum value at any time during the tax
year of their foreign bank accounts. So, if you had a bank account in Switzerland, bank
account in India, wherever it may be, if that value at any time exceeded $10,000, and that’s
the key threshold there for the FBAR, that you have to report. And so the FBAR is informational
form, which means that there’s no tax that’s actually owed. It’s just telling the IRS,
hey, I have a foreign account, which has or had in the tax year this amount and maximum
US dollars during the year. And so while I’m generally talking about foreign
accounts, there then lays the question of, well, how does this apply to Crypto, which
we’re here to talk about today. Can you list some of the exchanges that would
be considered a foreign entities? And you know, that you would have to report the holdings
of those exchanges? Yes. So, unfortunately not that easy because
a lot of exchanges that don’t even make their address public, it’s pretty hard to find.
And so sometimes even just as a starting point, I would list out all of the exchanges that
you’ve used and try to even Google and find their addresses. But there’s a couple that
we know at this point and the most popular is Binance.
They have a couple of different locations, oh, outside of the u s but typically we, we
refer to them as being located in Hong Kong. And so by answer is probably the largest historically
bitfinex. And actually Bitfinex is an interesting one. Bitfinex in 2018, informed their users
that they may be turning over, the information on their users to, the tax authorities, specifically
the British government who then have an information sharing agreement with the United States.
So many people suspect that Bitfinex has kind of self-reported themselves as a foreign financial
institution and their information is being shared, taxing authorities. So Bitfinex I
believe last year also restricted access to US people. But certainly in, in earlier years,
2018 in earlier, a lot of people use Bitfinex. How about the most popular, I would think
the most popular exchange amongst mainstream crypto traders, which would be Coinbase.
Yeah. Would that considered foreign or
Fortunately, not. Coinbase, Gemini, GDAX and a number of others are considered a US based
– they have their principal office, in the u s and so they don’t need to be disclosed
on a FATCA form. Okay. So how about FATCA? Can you describe
that a little bit? Yeah. So we talked a little bit about the
FBAR, which is a separate form. It’s not on your tax return. The form is, it’s actually
form 8938. It’s part of your tax return. So it’s filed with your tax return. It’s very
similar to the FBAR, but it’s not exactly the same. One of the first differences is
that the threshold for FATCA is higher. In the FBAR, Your aggregate maximum has to exceed
$10,000. So aggregate meaning that when you add your bank accounts or crypto exchanges
together, the maximum during the year exceeds $10,000. For FATCA the threshold is $50,000,
for a single person. So instead of $10,000, you have to be over $50,000 to have to file.
FATCA, just like the FBAR is an informational form, which means again, there’s no tax due.
The government just wants to know the maximum value of each account. One of the other differences
FATCA versus FBAR Is FATCA is more general, so FBAR only requires foreign bank accounts
to be recorded, whereas FACTA is both bank accounts and foreign assets. So if you owned
a part of a foreign company, if you had a foreign rentals a, in some situations it would
be disclosed on FATCA. In addition to bank accounts. So FATCA is broader, but at the
same time the thresholds are higher. I know you mentioned it, but I think it’s
important to reiterate that there’s no fee associated with filing these forms. If you
file them and you exceed the aggregate values, you’re not paying extra money. So that’s important
for people to understand. Now on the flip side, there is a penalty for not reporting.
So can you talk a little bit about the penalties for not reporting these forms?
Yeah. Yeah. So the FBAR form’s been around actually for quite some time, decades. Before
the Department of Treasury was in charge of administering it, it was just a separate group
called FINCEN and the FBAR was originally designed to try to identify money laundering.
and eventually it turned into identifying tax crimes. But the penalty structures really
haven’t changed much. The penalties for not filing an FBAR can be very severe. One of
the most basic penalties for not filing is $10,000 per year. And this is for non-willful
people. So people that didn’t know of the requirement but still then file. If the IRS
audits you and you didn’t file, one of the most basic penalties, again, is $10,000 per
year. The IRS has discretion to make it $10,000 per year per account. Now that’s if you’re
non willful, meaning again, you didn’t know that you had to file the FBAR and you just
didn’t file. But what if you were willful or you just disregarded
your requirement to file? Well then the penalties can be even higher up to 75% of the maximum
value your account or your exchange values. So it can be very severe. So while there’s
no tax, the penalties, ah, are much greater. So it’s one of those things that you do to
comply with the rules. it’s just an informational disclosure. It’s not very costly generally
to have an accountant prepare. But if you don’t, the penalties can be very high. And
the FATCA form itself also has penalties, similar penalties as well.
They’re both separate penalties. Right. So if you didn’t file either of them, you’d be
looking at some lofty penalties, correct? Correct.
So I’m sure a lot of people want to know how the IRS will know whether you failed to file
them willfully? How does the IRS enforce that? How do they know?
Yeah, so one of the ways is foreign crypto changes are identifying themselves as foreign
financial institutions and sharing that information. And again, the first one okay. Most people
are aware of this – Bitfinex started sharing this information, last year. And so if the
exchanges are turning over this information to the taxing authorities, that’s obviously
the most straightforward obvious way that the taxing authorities will come to know of
it. But even if the information wasn’t just handed over, you could be targeted just as
a in a random audit. So your tax return just randomly audited and it would be very easy
for the IRS to identify that you used foreign exchanges first. Even just identifying crypto
activity, it’s fairly easy because typically a bank account transaction occurs at some
point. But even from there, you know, one of the, strengths but also weaknesses of blockchain
is everything is transparent and the history is there forever. A lot of crypto activity
can just be traced and in a standard audit it can be identify that you used foreign exchanges.
So two ways. One, the exchanges are reporting and we expect in the coming years from more
and more foreign exchanges will be doing this, but then also just as part of a standard audit
or inquiry into your tax return, it can be fairly easily identified, right?
The penalty is lofty either way, willful or non-willful. Just out of curiosity, how do
they determine who was willful, who was not? Do they just ask you, hey, did you know about
it? It is complex and there’s a lot of different
case and have tested the definitions. But overall the standard for a willfulness or
the to be able to prove that you are not a willful, it’s very difficult because in general
if you file and sign your tax returns, signing under penalties of perjury that everything
is correct, but also you have an obligation to know the requirements and just saying,
I didn’t know the law. It isn’t necessarily sufficient. And one of the other things that
I guess I want to alert all the listeners to is that when you’re filing your tax return,
I’m schedule B, which is where interest and dividends are reported on the bottom of that
form there’s actually a couple of questions. The first question is, did you have any foreign
bank accounts? And then the second question is, if so, do you have an obligation to file
enough? And it’s a yes or a no checkbox. And a lot of people have no just checked or there
tax software has no check by default without ever really looking at this. And the IRS has
found and in several cases where someone checked no, but in fact you had these accounts.
You said no, but instead a lot of people just overlook this. They didn’t know what it meant.
And just check no. Or the software automatically did. So that’s, that’s a big red flag.
That’s interesting because so many people do try to do their own taxes, which is fine.
Yeah. But hopefully the, the software’s are catching up to a point where there alerting
people saying, Hey, if you’ve traded crypto, maybe don’t check no on this box.
Right. Or look into the FBAR and requirements. And, and I guess that kind of goes back to
the first question is, which is has the IRS said that the forms are in fact required for
crypto exchanges? And there hasn’t been any explicit guidance. So you haven’t seen like
back in 2014 when the IRS at least provided guidance. We haven’t seen any explicit and
crypto exchanges. But over the last couple of years, most practitioners have come to
agreement, in fact, crypto exchanges should be reportable. And there has also been, while
not official guidance from the IRS, there’s been correspondence that practitioners have
received that as basically indicated that yeah, FBAR & FATCA forms should be filed for
crypto exchanges. In coming years, I hope and I would expect that there’s some further
guidance, but until then, most practitioners and our firm included would suggest filing
FBAR and FATCA if you have foreign crypto exchanges or hold crypto that exceed the threshold.
Right. And that’s generally what I’ve heard from other guests that have discussed this
topic. But out of curiosity, has there, have you heard of anybody who has had to pay a
fee, for not reporting the FBAR in terms of crypto? Have you heard of any cases?
Not yet, but I would imagine they’re occurring. and they’re going to be occurring more and
more in the coming months in this tax season. Yeah. I think 2018 w was really, you know,
I’m among them first, I’m sorry, 2017. It was really among the first year where the
IRS has started to increase enforcement in these areas, although they’ve been auditing
and looking at crypto in earlier years, I think it’s really been the start, in the last
couple of years. And unfortunately we also had the government shutdown and some other
things that slowed things down. But I would expect this tax season especially that we
see more people being audited, not only specifically related to crypto but to foreign filing requirements.
so I haven’t personally seen it yet, but I would expect the very short term.
Interesting. And again, it’s one of those things that it’s fairly easy to do. You said
it’s fairly inexpensive if you hire a tax attorney to, to do it for you. So it’s one
of those things to be better safe than sorry. Yup, absolutely.
So now, what if somebody hasn’t, what if someone is listening to this for the first time? And
they never have heard of FBAR and now they’re worried because they traded crypto in previous
years, they may have had over $10,000 for the FBAR, $50,000 for the FATCA and they want
to amend previous years. What, what should they do?
Yeah. So overall, you know, I would suggest that if you had these requirements scenario
earlier years to take corrective action to amend or file the returns properly. And overall
that’s my suggestion because again, I do think it’s going to be in area of increased enforcement
for the IRS and if you amend and then later on you are audited, you know, worst case situation,
at least you’ve got everything corrected. Which should alleviate or reduce the penalties
or make that audit easier as well. So overall, it’s my guidance that, you know, you should
amend earlier years If you’ve identified that there are issues. Specifically in the area
of FBAR and FATCA, there are some IRS programs that are available to come forward, File these
forms for earlier years with a reduced or in some cases, no penalty at all.
The IRS streamlined offshore disclosure program. Under this program, you have to be non-willful
and you will actually self-certify so you’ll sign a statement saying no identified. Yeah,
basically that you didn’t know. but if you go through this program and there are some
other requirements to be aware of it, you’ll pay a five percent penalty and the maximum
balance of your foreign exchange value. So 5% is pretty high. Now, if you had $100,000,
that’s 5,000 and penalty. Okay. But really in the scheme of things, it could be a lot
worse. There’s not a late filing penalty. If you actually didn’t include some of your
crypto transactions, again, it has to be non-willful. He made a mistake, but you didn’t include
some of them. You can also amend your tax return and as part of this program, and it’s
still the same 5% penalty. So it’s a way that you can, if you have foreign exchange assets
that need to be disclosed, pay a fairly minimal penalty, clean up any of the old years, both
FBARs and tax returns. Okay. 5% does not seem like a too bad of a
deal compared to 10,000 or 50,000. It doesn’t seem like a bad deal to me.
I don’t think so either. I actually, I would expect that at some point this IRS program,
will no longer exist or that penalty will go up, but it’s here now and so it’s a great
one to take advantage of that you qualify. Okay, great. So do you have any other suggestions
for people dealing with this? Any tips or any, anything else you’d like to share with
people in this situation? Yeah, so I guess the number one tip is disclose.
Again, FBAR and FATCA are informational forms. There’s no tax, which I know we’ve stressed
many times, so it’s better to err on the side of caution and to file these forms. And you
know, find an accountant. In many cases it’s, it’s advisable to have an accountant or a
professional do it rather than yourself, but file them. And then secondly, a question that
I’m often asked is how do you actually identify the maximum? It’s really hard to do. Well
do your best is was kind of the short answer that I have. Actually on the FBAR, there’s
a checkbox for the account. If you don’t know the maximum value you can actually check a
box says it’s unknown. So just not knowing the maximum is not an excuse, doesn’t get
you out of the requirement to file. Just do your best. And in some cases or most cases
you can estimate pretty well. You know what those maximums are.
Can somebody basically print off or export a form from the exchange and then they can
look at their highest balance, you know, let’s say they had three bitcoin at one point, or
they can kind of estimate what their highest balances and then all they really need at
that point is the price at that date. Right? The price of the coin on that date to see
if they kind of reached that limit. So let’s say the maximum they had was three bitcoin
and they had it in know March of 2018. March 1st, 2018 they had three bitcoin. Couldn’t
they basically just even using bitcoin.tax, they could go in and see what three bitcoin
was worth on March 1st, 2018 to see if they reach that, that number.
Yeah. Yeah. I mean it won’t be exact because we could probably identify like spot prices
and so forth. Yeah. But it’ll get you pretty close. and so, you know, if you’re right on
the fence, you know, right at about 10,000, it may make sense to try to get more accurate
to identify are you over or not. Or just err on the side of caution and just report it
either way. But yeah, it’s not necessarily a precise science. It can’t be with crypto
fluctuating. And you know, people can be trading in and out all day long. And so that value
can be changing constantly. Just do your best. And if that means, you know, taking the day
average price and applying that, so be it. Right. And I know other guests have mentioned
that there are two different thresholds for FBAR, single and married, right? 10,000 for
single. And is it different if you have a spouse?
Actually, for the FBAR, it’s the same. it’s $10,000 regardless. So yeah, FBAR $10,000
and that’s it. So form 8938, that’s a little bit different. if you are married, it depends.
So the FATCA has a bunch of thresholds. Talk to you preparer about it. So if you’re above
the FBAR threshold, you may have to file. If you are not over the top by requirement,
you may also have FATCA if you have other foreign assets. But if you’re only holding
crypto foreign crypto, if you don’t have the FBAR, you don’t have FATCA.
There’s different thresholds. Actually four different depends on if you’re living in the
US or abroad. and then married or single, but the minimum is $50,000. And then depending
on all the above there’s other thresholds. Okay, great. Well thank you for clarifying
that. Sure.
All right, well Andrew, thank you very much for sharing this information with our listeners.
I’m sure they’ll appreciate it. And if somebody wants to get in touch with you, how can they
get in touch with you? Yes, so I’m, my Twitter is @accounting. It
is actually just the word accounting is the easiest way to find us on Twitter. And then
our website is GordonLawltd.com. And you were able to secure the Twitter handle
@accounting? Yes, I was.
That’s pretty awesome. That’s great. Yeah. Cool. Awesome. All right, well thanks again
and thank you everybody for listening. Be sure to stay tuned for more podcasts related
to cryptocurrency and taxation. If you want to request a topic or be a guest on the podcast,
email us at [email protected] Andrew, thanks again man, and have a nice day.
Sure. Thank you. Yup.

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