By: Christopher Galakoutis, Reynolds + Rowella
In 2014, the Internal Revenue Service (IRS) issued initial guidance on cryptocurrencies with Notice 2014-21. Particularly how taxpayers who held Bitcoin, as well as other virtual currencies, would be required to report transactions involving these cryptocurrencies for US income tax purposes.
Specifically, the IRS stated such virtual currencies were not a ‘currency,’ but rather property that was to be treated as a capital asset. In addition, the IRS also reminded taxpayers that failure to accurately report income from cryptocurrency transactions would result in civil and criminal penalties.
In 2019 the IRS added a question to Form 1040 (US Individual Income Tax Return), Schedule 1, which asked taxpayers to respond ‘yes’ or ‘no’ regarding any transactions or any financial interest in any virtual currency. That same question has, for 2020 tax purposes, graduated to page one of Form 1040 itself.
With regards to foreign account reporting, because Notice 2014-21 did not address whether reporting of these cryptocurrencies was required for purposes of FinCEN Form 114 (also known as FBAR), there has been uncertainty surrounding this question. The filing threshold for FinCen Form 114 is reached when the aggregate value of a taxpayer’s foreign financial accounts exceeds $10,000 at any time during a calendar year, with significant penalties possible for non-compliance.
On December 30, 2020, the US Treasury Department via its Financial Crimes Enforcement Network (FinCEN), announced in a short notice published on its website, its intention to propose to amend regulations implementing the Bank Secrecy Act. Notice 2020-2 states that such amendments would seek to include virtual currency as a type of reportable account for FBAR purposes. No date was stated.
In addition to the FBAR, US taxpayers may also have obligations to report their foreign assets on Form 8938, Statement of Specified Foreign Financial Assets, which is a part of the Form 1040. The thresholds for completing that form are different than for the FBAR, while also potentially including a wider scope of foreign assets.
Reynolds + Rowella can assist clients assess whether US reporting requirements apply to them under either the FinCen 114/FBAR rules or Form 8938. Clearly, virtual currencies remain of high interest to the IRS particularly as they continue to set record prices. Please contact Reynolds + Rowella for more information.
About Reynolds + Rowella
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.
Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.