I had the opportunity to participate on a Legal Panel with David Silver at the Unconfiscatable, Bitcoin not Blockchain Conference put on by Tone Vays in Las Vegas. It was quite an honor to be part of it; the conference was hands down the best Bitcoin event I’ve attended since Jason King hosted Coins in the Kingdom.
At the end of the panel, we opened up for a Q&A and one of the questions was something I had never considered before. The gentleman asked if after moving his Bitcoin off Coinbase and onto his cold storage, would he be required to file an FBAR because the Bitcoin is located on all the nodes across the world.
David had the right idea telling the guy we can’t give legal or tax advice on stage. I tried to flub my way through the question using an analogy of the foreign private issuer test — where if you are a foreign registered company, but at least 50% owned by Americans living in America, you must still file American taxes. I thought that if you’re domiciled in America, the private key is likewise located in America, and not relevant for an FBAR. It makes some sense, but I knew it wasn’t the full analogy.
After the discussion, I researched it further and found some simple guidance on FBAR here: https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar.
In summary, if you own a financial interest worth $10,000 or more, or you have signing authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, you have to let the IRS know about these assets by April 15, 2019. You don’t have to pay any taxes on them, you just have to provide them with the information that they are under your control.
It seems a stretch to lump the bitcoin blockchain in that category with physical banks domiciled overseas. Nonetheless, the civil penalty for not disclosing your 10K or more foreign assets is $12,459 per WILLFUL violation — pretty steep; I understand why the gentleman wanted clarity.
Since our only guidance on how to handle virtual currency tax is that IRS 2014–21 https://www.irs.gov/pub/irs-drop/n-14-21.pdf — at this stage of the game, it would be a far stretch for the IRS to say anyone not filing an FBAR report for their bitcoin stored on a physical ledger/trezor/opendime/paper wallet located in America has WILLFULLY violated. The IRS would have to tell us they consider all private keys to be foreign-owned financial interests first, let’s hope it never comes to that.
I remembered @CryptoTaxGirl on twitter mentioning the FBAR previously, and was able to find some great reassurance from her tweets. It turns out she asked this very question to the IRS and was told, “if you have coins that are stored on a digital wallet in which you have control over your private keys, these coins would not be subject to FBAR reporting. A digital wallet is not a foreign financial account.” https://twitter.com/cryptotaxgirl/status/1005255678972317696?lang=en
Now, your crypto held on exchanges, that IS considered reportable — all the more reason to hold your own coins.