Foreign Cryptocurrency Accounts

The Bank Secrecy Act is legislation that requires banks to make sure they have practices in place to keep their clients from using them for money laundering, terrorism, and other illegal practices.

The law stipulates that US citizens and residents must provide information about foreign accounts. They must disclose this information to the Financial Crimes Enforcement Network (FinCEN), which is part of the U.S. Treasury Department.

The purpose of FinCEN is to safeguard your financial interests and ensure that your foreign accounts are held up to some sort of standard, thereby minimizing the risk.

FinCEN has provided specific guidance dealing exactly with the issue of cryptocurrency that is held in overseas accounts. They have recently indicated that the requirements are set to be beefed up in the not so distant future.

 As it stands, the requirement to report offshore accounts to FinCEN only applies to applicable accounts and is not an automatic obligation.

Applicable accounts are those that are owned by a U.S. entity (citizen, resident, or company doing business in the U.S.), who have more than $10,000 combined held in overseas accounts.

For this calculation, the value of cryptocurrency is not considered. FinCEN will only be made aware of cryptocurrency held overseas if it forms part of an account holding other assets, which do need to be disclosed. Accounts that entirely consist of cryptocurrency and nothing else do not need to be disclosed.

Proposals for Further Disclosure Requirements

The current state of play isn’t going to last for long, however. It is on FinCEN’s radar to include the value of cryptocurrency when working out if accounts held overseas are reportable or not.

The effect of this change is going to be huge for all those in the U.S. who invest in cryptocurrency abroad. There will be nowhere to hide, and investors should expect full transparency.

Overseas virtual currency investors need to be aware of more than the Bank Secrecy Act.

The Foreign Account Tax Compliance Act (FATCA) imposes its own rules and regulations in relation to reporting cryptocurrency held by Americans in foreign accounts.

If you hold assets of more than $50,000 abroad, at any point during the tax year, you need to make the IRS aware. This $50,000 can be made up of any type of asset including cryptocurrency. If you are married and file jointly, the figure is $100,000. US citizens who live abroad can own up to $20,000 in foreign assets before the reporting threshold is triggered.

This is significantly different from the rules contained in the Bank Secrecy Act, where cryptocurrency only had to be declared if it was mixed in with other assets as part of another account.

While it is advisable to be completely honest with the IRS and report as necessary, there is still skepticism about how efficient the Foreign Account Tax Compliance Act will be at catching those who don’t report cryptocurrency.

Even when tracking physical assets and accounts, the IRS, foreign banks and financial institutions, and foreign governments are required to work closely together to assess the relevant information. It is not yet clear how this already labor-intensive exercise will translate into tracking down accounts consisting solely of cryptocurrency.

Penalties for Failure to Disclose Overseas Assets

Both pieces of legislation include the powers to sanction non-compliance. It is a criminal offense to knowingly hide or fail to disclose assets held overseas. The penalty for this crime, if found guilty, is a fine of up to $250,000.

Civil sanctions will also apply. If the failure to disclose was deliberate, a fine of up to $100,000 can be imposed. This is in addition to the potential fine for the criminal offense. A civil sanction can also apply if the failure was not deliberate per se, but just an oversight or caused by ignorance. In the case where the IRS cannot prove an intention, there could be a fine imposed of up to $10,000.

Thank you in advance for reading “The Ultimate Guide to Bitcoin, NFTs and Virtual Currency Taxation.” It was a labor of love, and our law firm welcomes all questions, comments, concerns, and feedback that you may have about this free resource.