FinCEN Giveth With One Hand, Taketh With the Other by Confirming Virtual Currency Isn’t Reportable on an FBAR Form but Proposing to Require Reporting in Future and More Reporting by Money Services Businesses By EVAN J. DAVIS
The intersection of virtual currency with Bank Secrecy Act (BSA) and tax laws frequently results in a square peg, round hole problem. All too often, regulators try to solve the problem as would a toddler, by pounding as hard as possible to make the square peg fit in the round hole. Witness the IRS treating virtual currency as property, not currency, resulting in buying a latte at Starbuck with bitcoin as a taxable event requiring the computation of basis because the IRS hasn’t seen fit to establish “de minimis” transaction exclusions. Unlike the IRS, FinCEN (another arm of the Treasury Department) treats virtual currency as currency and regulates it accordingly, at least most of the time. And don’t get me started about how the SEC and CFTC apply securities and commodities regulations to virtual currency. The agencies’ conflicting regulations prove the adage: If you’re a hammer, everything looks like a nail. It’s small wonder so few taxpayers have complied with tax laws surrounding virtual currency when the IRS’s rules make routine transactions using virtual currency into events that require the user to scurry home and input the transaction into an Excel spreadsheet before she forgets to log her basis and sale price.
Regarding the Foreign Bank Account Report (FBAR) form, practitioners have been wondering for years whether certain virtual currency holdings need to be reported. Keep in mind that FinCEN has treated “exchangers and administrators of convertible virtual currency” as subject to the money transmitter rules under the BSA since 2013. The BSA is designed in large part to require reporting of transactions that may be associated with illegal activity, resulting in law enforcement being able to identify the illegal activity through the BSA reports. The purported anonymity of virtual currencies (some more than others) is attractive to those who want to remain off of the government’s radar screen, whether for illegal or other reasons. Those who violate the BSA are subject to stiff civil and criminal penalties. Essentially, FinCEN recognizes that people use virtual currencies as a cash alternative and that persons playing intermediary roles in virtual currency transactions should be treated like fiat currency intermediaries. Despite making this clear pronouncement, it took seven years for FinCEN to clarify that virtual currency is not reportable on current FBAR forms in Notice 2020-2. Filing Requirement for Virtual Currency (fincen.gov)
This conclusion was far from obvious. Cryptocurrency exchanges are based both inside and outside the United States, and even US-based exchanges may have servers overseas. It may even be impossible for an accountholder to know where precisely their cryptocurrency is being held by an exchange. Perhaps an easier example from an FBAR perspective is “cold storage,” where the private keys giving access to the virtual currency are held in a device not attached to the Internet for security purposes. If the cold storage device (which is normally portable) is overseas, then arguably the owner should be worried about filing an FBAR.
As nice as it is to hear that virtual currency holders have one less thing to worry about, FinCEN delivered this good news wrapped in bad news. FinCEN announced that it intended to propose amending FBAR regulations to require reporting of virtual currency “as a type of reportable account.” FinCEN offered no additional information, and the unanswered questions abound. how is “virtual currency” an “account”? What factors demonstrate whether a virtual currency holding is foreign or domestic?
At the same time, FinCEN proposed another rule to require money services businesses to report and keep records on certain transactions with “unhosted wallets.” 2020-28437.pdf (federalregister.gov) The upshot of the “proposed” regulation – proposed in name only as FinCEN noted that the regulation is not subject to notice-and-comment rulemaking – is that any entity that qualifies as an MSB will have to conduct “know your customer” validation on the wallet owner and retain records for production to FinCEN.
The effect of these two changes will be to substantially reduce anonymity vis a vis the US government as well as substantially increase the chance that owners of large crypto holdings will be targets for hackers, extortionists, and other miscreants. It’s unclear whether additional regulation will make virtual currencies less attractive or, as some have argued, will bolster the legitimacy and lead to more widespread adoption. The one certainty is that more regulation will lead to more work for lawyers and accountants.
EVAN J. DAVIS – For more information please contact Evan Davis – firstname.lastname@example.org or 310.281.3288. Mr. Davis has been a principal at Hochman Salkin Toscher Perez P.C. since November 2016. He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division where he handed civil and criminal tax cases and eight years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal. As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator. Among other awards as a prosecutor, he received an award from the CDCA Bankruptcy Judges for combatting Bankruptcy Fraud and the U.S. Attorney General awarded him the Distinguished Service Award (DOJ’s highest litigation award) for his work on the $16 Billion RMBS settlement with Bank of America. Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards. He is a magna cum laude and Order of the Coif graduate of Cornell Law School and cum laude graduate of Colgate University.Mr. Davis represents individuals and closely held entities in federal and state criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud.