FinCEN Notice 2020-2: FinCEN’s Intent to Add Crypto Currency to the List of FBAR Reportable Accounts – by JONATHAN KALINSKI and GARY MARKARIAN
Posted by Hochman Salkin Toscher Perez P.C. 
Posted on Friday, March 05, 2021
The price of Bitcoin rose dramatically in 2020 and even doubled in price since the beginning of 2021. On January 1, 2021, Bitcoin was $29,336.31 and on February 21, 2021, it was $58,012.09. Many who have sold their Bitcoin have made a profit. Where there’s profit, there’s income – and where there’s income, there’s tax.
When it comes to money and taxes, one can expect that the IRS will be the most likely government entity to be interested in a financial transaction. However, the Financial Crimes Enforcement Network (FinCEN) is also very involved with monitoring money and financial transactions. FinCEN’s mission is “to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence.”
The IRS and FinCEN have, at times, had interest in the same financial matters. For example, as part of FinCEN’s focus on money laundering, that agency requires the reporting of certain foreign financial accounts on a Foreign Bank Account Report (FBAR). It is no secret that the IRS has also showed a tireless interest in FBARs beginning in earnest in 2008, after the Department of Justice obtained a deferred prosecution agreement against UBS, the Swiss banking regulator, and thereunder the disclosure of information about United States citizens with undisclosed foreign accounts in Switzerland.
Now both agencies, in an apparent connection to FBAR disclosures, have also taken steps to publicize their respective, and arguably shared, interest in cryptocurrency. As part of the IRS’s focus on tax compliance, the IRS has designated cryptocurrency, including international transactions, an enforcement priority for the last few years. Most recently, FinCEN has also make clear that agency’s interest in cryptocurrency, as evidenced by their latest proposed amendment.
FinCEN’s proposed amendment seeks to add virtual currency to the list of financial accounts that need to be reported on an FBAR. Current FBAR regulation, 31 CFR 1010.350(a), states “Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists…”
Current regulations provide that the types of reportable accounts include bank accounts; securities accounts; accounts with a person that is in the business of accepting deposits as a financial agency; insurance or annuity policies with a cash value; an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; mutual funds or similar pooled funs; or other investment funds. (31 CFR 1010.350(c)).
Notably, virtual or cryptocurrency is not a type of account required to be reported to the government under the regulations. Although that is not a shock, as the statute was enacted in 1970, many years before crypto currency was likely more than a twinkle in the eye of the dark web or any other exchange. It appears that 2021 may be the year that the regulation catches up and addresses foreign cryptocurrency accounts in the context of required disclosures on an FBAR.
FinCEN recently announced its intention to propose amendments to the regulations implementing the Bank Secrecy Act (BSA) regarding the FBAR to include virtual currency as a type of reportable account under 31 CFR 1010.350.
Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.[1]
FinCEN’s announcement would add a second reporting requirement to taxpayers that own virtual currency. The 2019 Form 1040’s Schedule 1 for the first time added a question to the top of the form that was not previously found in previous Form 1040’s:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The form provides a checkbox for either “yes” or “no”.
Requiring virtual currency reporting on an FBAR, like other reporting requirements, is often more than an exercise in filing additional paperwork. As the penalties and potential criminal exposure surrounding FBAR non-compliance have shown, the failure to disclose reportable virtual currency accounts on the FBAR may lead to even greater consequences than the already, often daunting consequences of a failure to report taxable transactions on a Form 1040.
Failure to report virtual currency on a Form 1040 can not only lead to criminal prosecution, but also additional tax, interest, and penalties, including the civil fraud penalty. The failure to report on the FBAR may lead to penalties as high as 50% of an account’s highest balance per failure to file. Of course, there is also the potential that the government could pursue both forms of penalties for non-compliance on the two separate forms. Reminding Taxpayers of the obligation to report income from all sources, including virtual currency, couldn’t be timelier. The requirements to report virtual currency transactions may soon extend beyond the Form 1040, Schedule 1. FinCEN’s proposed amendments to regulations reporting of virtual currencies could soon place on U.S. taxpayer a reporting requirement on the annual FBAR form. As the IRS and FinCEN join forces to focus on virtual currency, the message is clear that cryptocurrency enforcement is here to stay.
[1] FinCEN Notice 2020-2
Jonathan Kalinski is a principal at Hochman Salkin Toscher Perez P.C., and specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world. He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.
Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters. Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters. Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court. [1]
Gary Markarian is an Associate at Hochman Salkin Toscher Perez P.C., and a graduate of the joint JD/LL.M. Taxation program at Loyola Law School, Los Angeles. While in law school, Mr. Markarian served as an intern at the Tax Division of the U.S. Attorney’s Office (C.D. Cal) and Internal Revenue Service Office of Chief Counsel’s Large Business and International Division.
