Unless you have a second home in Spain or private business interests in Geneva, you probably aren’t familiar with Foreign Bank and Financial Account Reporting (FBAR) or Foreign Account Tax Compliance Act (FATCA) requirements.
But if you buy and sell cryptocurrencies, you may need a crash course. FinCEN (Financial Crimes Enforcement Network) wants to include foreign cryptocurrency accounts in future FBAR requirements. Many tax experts have recommended completing FATCA requirements if you have foreign crypto assets.
In this guide, we’ll add these new acronyms to your lexicon (alongside IRS, SEC, DOJ, CTFC, and countless others), help you determine if you need to file, and show you how to streamline the process with crypto tax software.
What is FBAR & FATCA?
Foreign Bank and Financial Account Reporting, or FBAR, refers to FinCEN Form 114, which tracks foreign financial assets to prevent tax evasion and other crimes. It requires any U.S. citizen with at least $10,000 in one or more foreign bank or brokerage accounts during the tax year to report the account balances to the Treasury Department.
Meanwhile, the Foreign Account Tax Compliance Act, or FATCA, has a broader scope affecting foreign financial “assets” rather than just offshore “accounts.” While the IRS hasn’t provided specific guidance, experts recommend filing Form 8938 to report foreign financial assets if it’s over $50,000 when living in the U.S. or $200,000 when living abroad.
Do You Need to File?
FinCEN only requires taxpayers who maintain an overseas account with cryptocurrencies alongside other assets subject to reporting to file FBAR reports. So, for example, if you had a foreign crypto exchange account and converted cryptocurrencies into hard currency within that account, you may be obligated to declare the account’s value.
However, FinCEN Notice 2020-2 clarifies that the agency intends to amend regulations that require you to identify virtual currencies as reportable accounts for FBAR purposes. While these plans haven’t come to fruition as of this article’s publication, there’s a real possibility that it could become a requirement soon—even for crypto-only accounts.
IRS Form 8938 requires you to match each foreign asset transaction with the associated entry on your tax return, among other things.
On the other hand, everyone with a foreign crypto exchange containing assets should consider filing Form 8939 to comply with FATCA. According to Tax Notes, an IRS official hinted that taxpayers should file form 8938 moving forward to avoid penalties. However, they noted that they probably wouldn’t be pursued for previous tax years.
FATCA’s reporting requirements kick in when you have more than $50,000 worth of foreign financial assets as someone living in the U.S. or $200,000 if you live abroad. Generally, living abroad means spending at least 330 days in a foreign country within 12 months. And these thresholds double if you are filing jointly with a spouse.
Forms & Deadlines
The annual FBAR report is due the same day as regular tax returns, which typically falls on April 15th unless it’s a weekend or holiday. However, unlike a typical tax return, you receive an automatic extension to file your FBAR by October 15th without filing any paperwork. Meanwhile, FATCA’s Form 8938 falls under the standard IRS tax deadlines.
If you miss the tax requirements for a prior year, you should be careful when submitting information for the current year. There’s a risk of making a “quiet disclosure” if you begin filing in the current year without following one of the IRS-approved procedures. So, if you fall into this category, consider contacting a tax law specialist to help.
A failure to disclose foreign accounts to the Treasury Department via FBAR results in much more severe penalties than the IRS levies. For “non-willful” failures to file, the penalty is $10,000 per failure. For “willful” failures, the penalties are up to $100,000 or 50% of the balance in the account at the time of the violation.
The IRS has increased scrutiny of specific streamlined procedure submissions. You could incur significant fines and penalties if you submit an intentionally false narrative under the streamlined procedures and get caught. If you deliberately violated tax laws, you should report under the IRS Voluntary Disclosure Program instead.
The voluntary disclosure program could reduce the penalty to a 5% miscellaneous penalty rather than the $10,000 “non-willful” penalty for each year and any add-on civil penalties, such as the 20% accuracy penalty and civil fraud penalties.
You can file FBAR/FinCen Form 114 online here:
https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html
You can find more information about FATCA’s Form 8938 here:
https://www.irs.gov/forms-pubs/about-form-8938
How to Accurately File
The annual FBAR report is relatively high level, providing the Treasury Department with account numbers and balances for your foreign accounts. While there’s not much in-depth required information, it might take time to collect the details of your foreign accounts, compute your maximum balances, and complete the paperwork.
Unfortunately, FATCA’s Form 8938 is slightly more complicated. The IRS requires you to match each foreign asset to the form and line that you reported on your taxes and provide detailed information for each foreign account. You may need to provide even more details if you have foreign assets that fall outside of typical classifications.
The good news is that crypto tax software can help you automate the process. By connecting your wallets and exchanges, ZenLedger and other platforms can quickly determine your maximum account balances for FBAR, classify transactions for FATCA, and avoid the need to sort through spreadsheets of data.
ZenLedger simplifies tax time by importing and aggregating your transactions across online exchanges and offline wallets.
ZenLedger automatically generates your FBAR and Form 8938 paperwork. Even better, you can access a Grand Unified Accounting report that backs the figures on the forms with specific transactional data. That way, if you ever experience an audit or your accountant has questions, it’s easy to pull the data you need.
Of course, these same capabilities make computing capital gains taxes a breeze, enabling you to accurately report your tax liabilities without overpaying or running the risk of underpaying. The tax loss harvesting tool can even help you find opportunities to save throughout the year by selling losing positions to realize losses.
The Bottom Line
The government continues to crack down on crypto tax evasion and money laundering. While the Treasury Department doesn’t require you to report crypto-only transactions under FBAR, they may catch several accounts involving fiat transactions in the dragnet. And, while the IRS hasn’t provided specific FATCA guidance, it’s a good idea to file Form 8938 if you meet the requirements to be on the safe side.
Of course, FBAR and FATCA aren’t the only complex forms crypto traders, investors, and enthusiasts need to file each year. If you sold crypto, you must also report each capital gain or loss and the aggregate amount on your taxes. Unfortunately, this can be challenging if you have multiple accounts since you must match transactions across these accounts.
ZenLedger can help you file annual tax documents, like your Form 1040 and Form 8949, and more complex forms, like FBAR and FATCA. By aggregating transactions across your exchanges and wallets, the platform is accurate and comprehensive, ensuring that you never get hit with an unexpected tax bill or an unnecessary audit.
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
