After a long period of relatively low scrutiny, probably because Bitcoin values were relatively stagnant, the cryptocurrency is now on the Service’s (IRS) radar. Under current “law,” and that is using the term loosely, Bitcoin is probably not reportable on FBAR forms. However, since this declaration comes not from Moses as he descended the mountain, or even IRS Commissioner John Koskinen, things can change very quickly and it’s important to be ready for these changes when they come.
So far, the only clear and reliable directive is that Bitcoin is a capital asset, just like precious metals and corporate stocks. There is some consistency there, as gold and silver bars, no matter how big they are, buy nothing at Walmart. Just like foreign account holders don’t have to report precious metals in offshore safe deposit boxes, taxpayers also don’t have to report Bitcoin in virtual wallets. That was the view that IRS analyst Rod Lundquist espoused in June 2014, a date that seems like light-years ago now. Speaking at a conference, Mr. Lundquist said “virtual currency is not going to be reportable on the FBAR, at least for this filing season.” In legal terms, this pronouncement has exactly zero effect. But it does offer insight into the Service’s attitude toward crypto-currency.
There’s another caveat as well, in terms of the type of account. To return to the precious metals analogy, gold and silver exchange accounts are reportable on the FBAR, basically because if the taxpayer has a ready way to convert assets into income, the IRS wants a piece of the action. The same thing applies to Bitcoin exchange accounts. If the taxpayer can convert assets into income with almost literally the click of a mouse, the account is definitely reportable.
A lot has happened since 2014. The Cubs won the World Series, American Idol breathed its last breath, there was that whole election thing, and an obscure federal judge ordered a virtual currency exchange in San Francisco to hand over information to the IRS. Earlier, the IRS had served a “John Doe” subpoena on Coinbase, seeking information about people who might have violated U.S. tax law. Why did the Service go sniffing around a Bitcoin exchange that, according to its own rules, may not have contained taxable income?
Predictably, there was a method to the madness. The explosive growth in the crypto-currency sector has created “questions about tax compliance,” asserted Deputy Assistant Attorney General Caroline D. Ciraolo. In the same press release, IRS Commissioner John Koskinen dropped this potential bomb: “Transactions in virtual currency are taxable just like those in any other property.” Since the Commissioner did not use the i-word (income), he may have been referring to the existing rule regarding Bitcoin exchanges. Or, his pronouncement may signal a more assertive stance. The whole IRS scene is very fluid right now. According to various reports, Commissioner Koskinen, whom some Republicans tried to impeach last year, may be on his way out. What a new Commissioner would do about the Bitcoin/FBAR rules, if anything, is a matter of reading the tea leaves, and I admittedly failed that class in law school.
With about four months to go before the FBAR filing deadline, Bitcoin is probably exempt as long as it’s not in an exchange account, but stranger things have happened…