June 2018 JD Supra
jd supra logo

If my Virtual Currency is walking around with me, is it reportable? – JD Supra 7/19/18.

Virtual Currency (VC) storage comes in the form of a “wallet” with private digital keys. The “wallets” can be domiciled in VC exchanges that operate in the US or foreign jurisdictions.  VC exchanges domiciled in foreign jurisdictions that operate similarly to a financial institution and or brokerage operation can be viewed as Foreign Financial Institutions FFIs) and VC held at FFIs could be subject to FATCA and FBAR reporting requirements.  On line “wallets” where the digital private key is held by the third party is the most convenient option for a VC holder, but the least secure option.   How these private digital keys are stored is critical to both safety and to also, reporting requirements – such as FATCA and FBARs.

According to industry experts in the universe of VC, security is the number one concern of VC holders.  The experts have also stated that the securest option for a VC holder is to keep their VC holdings “offline” or “cold – stored” in order to avoid hacking risk or infiltration from a third party.  Cold storage means that the VC is not in a web server (non-internet connected); the VC is in a USB Drive or Hardware for storage or in paper form (paper wallet) and the VC holder has the “full control” of the private key.

Since the IRS has not released any Guidance on VC since Notice 2014-21, the American Institute of Certified Public Accountants (AICPA) wrote to the IRS to submit the AICPA’s Recommendations for IRS VC Guidance.  The letter (https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/20180530-aicpa-comment-letter-on-notice-2014-21-virtual-currency.pdf) recommends 27 Frequently Asked Questions (FAQs).  There are 2 FAQ’s that address the foreign reporting requirements for VC.  They are:

“Q-26: Are taxpayers who hold virtual currencies and/or fiat currencies, on centralized virtual currency exchanges operating in a jurisdiction other than the U.S., required to report the value of the virtual currencies if the reporting threshold is met for both FBAR and FATCA compliance?

A-26: Yes. The value of virtual currencies should aggregate with fiat currencies and any other assets required for reporting under both FBAR and FATCA if their respective reporting thresholds are met.

Q-27: Are virtual currency wallets where taxpayers own, control, and are in possession of private keys for their own virtual currency wallets considered a Foreign Financial Institution for purposes of both FBAR and FATCA compliance?

A-27: No. Virtual currency wallets are owned and controlled by the taxpayer when in possession of the private key for that particular wallet. In this case, the virtual currency is considered cash which resides wherever the taxpayer resides and is therefore not considered a Foreign Financial Institution or subject to either FBAR or FATCA compliance”.

When taxpayers own, control, and are in possession of private keys for their own virtual currency wallets, the virtual currency is considered cash which resides wherever the Taxpayer resides

For purposes of FATCA and the FBAR, what is known as a “Not Specified Foreign Financial Asset” does NOT have to be reported.  Not Specified Foreign Financial Assets are:

⦁    cash (currency) not in a financial account
⦁    property (real estate; a personal residence or a rental property)
⦁    precious metals (gold – jewelry)  

The AICPA states that:  “when a taxpayer owns, controls and is in possession of a private key for a virtual currency wallet, they have 100% custody and control over all of the virtual currencies held in that wallet. If the taxpayer loses the private key, they lose all of their funds. This concept is akin to the taxpayer holding cash, gold, or any other asset in their personal possession. When the taxpayer owns, controls, and is in possession of the private key, the virtual currency resides in the country of the taxpayer’s residence. In the case of a U.S. resident, the virtual currency by definition resides in the U.S. There is no Foreign Financial Institution (FFI) or financial institution of any kind because the taxpayers maintain possession similar to cash or gold. The same principles apply to both the FBAR and the Foreign Account Tax Compliance Act (FATCA)”.

Don’t be a victim of your own making

VC investors ought to analyze how to hold their VC for safety with safety in mind as well as with reporting requirements such as FATCA and FBAR.    VC investors that have VC held in foreign wallets that are domiciled overseas might have reporting requirements if they meet the reporting requirements thresholds.

VC investors ought to consult with their specialized tax representative before making any reporting decisions.