The Biden’s Administration 2024 Revenue Proposal includes US taxpayer reporting requirements for foreign digital asset accounts. The proposal would be effective for returns required to be filed after December 31, 2023. Tax compliance and enforcement with respect to digital assets continues to be a growing problem for the US Government given that the digital asset industry is entirely digital and US taxpayers can transact with offshore digital asset exchanges and wallet providers without leaving the US. The sentiment is that the digital asset market can provide a US Taxpayer with the ability to conceal assets and taxable income via offshore digital asset exchanges and wallet providers. Moreover, US Taxpayers could circumvent US tax reporting by creating “entities” and utilizing the entities as conduits to transact. Having said that, the bottom line is that Taxpayers with digital assets ought to acknowledge that third-party digital asset reporting is coming.
Current Law that covers foreign financial asset reporting
Section 6038D of the Internal Revenue Code requires any individual that holds an interest in one or more specified foreign financial assets with an aggregate value of at least $50,000 during a taxable year to attach a Statement with required information (Form 8938, Statement of Specified Foreign Financial Asset) to the individual’s tax return by the due date (including extensions) for that return. Treasury regulations under section 6038D also apply the requirements of this section to domestic entities formed or availed of for purposes of holding specified foreign financial assets.
A specified foreign financial asset means:
- a financial account maintained by a foreign financial institution
- certain specified foreign assets not held in a financial account maintained by such a financial institution. Information required to be reported includes the name and address of the financial institution where an account is maintained, the account number, as well as identifying information about assets not held in a financial account.
Requiring individuals specifically to report their offshore holdings of accounts with digital assets, subject to significant penalties if they fail to do so, is critical to combat the potential for digital assets to be used for tax avoidance
President Biden’s 2024 Revenue Proposal states that failure to provide the required information for a taxable year is subject to a penalty of between $10,000 and $60,000 for each such failure, absent reasonable cause. In addition, the accuracy related penalty on underpayment of tax in section 6662 of the Internal Revenue Code, which is typically 20 percent of the underpayment, is increased to 40 percent for an underpayment that is attributable to a transaction involving undisclosed foreign financial assets. In the case of any information which is required to be reported pursuant to section 6038D, the time for assessment of any tax with respect to any tax return, event, or period to which such information relates is extended to three years after the date on which the taxpayer provides the information required to be reported (absent reasonable cause). The statute of limitations in section 6501 for IRS assessment is extended from the usual three years to six years if a taxpayer fails to report an amount of income (above a de minimis threshold of $5,000) that is attributable to an asset subject to reporting under section 6038D (or would be required to be reported if section 6038D were applied without regard to the $50,000 threshold, and without regard to any exceptions identified by the Secretary or her delegates (Secretary) in regulations).
Foreign Digital Asset Accounts would be a new category of assets
The new third category would be any account that holds digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider (a “foreign digital asset account”). Reporting will be required only for taxpayers that hold an aggregate value of all three categories of assets in excess of $50,000. A foreign digital asset account would be defined based on where the exchange or service provider is organized or established.
Taxpayers ought to Remember this
Failure to provide the required information for a taxable year is subject to a penalty of between $10,000 and $60,000 for each such failure, absent reasonable cause. In addition, the accuracy related penalty on underpayment of tax in section 6662 of the IRC (typically 20 percent of the underpayment) is increased to 40 percent for an underpayment that is attributable to a transaction involving undisclosed foreign financial assets. ©