Do I need to Report Bitcoin on my FBAR?

The explosive growth in the crypto-currency sector has created “questions about tax compliance.” Back in March 2014, the IRS issued long-awaited guidance (IRS Notice 2014-21) labeling cryptocurrency, including Bitcoin, as “intangible property.” Investors and traders hold Bitcoin as a capital asset, as if it were a precious metal or corporate stock. Because it’s a capital asset, the IRS requires American resident taxpayers to report Bitcoin trading income and losses worldwide on U.S. resident tax returns.

In other words, if you trade bitcoin, you must report capital gains to the IRS. It doesn’t matter whether you repatriate funds back to the U.S., or not.

As far as accounting goes, investors and traders holding cryptocurrency should use capital gain or loss tax treatment on sales and exchanges, with the realization method. For example, if you buy Bitcoins with U.S. dollars and later sell them for U.S. dollars, a capital gain or loss needs to be reported on that transaction.

Americans also trade Bitcoins on Bitcoin exchanges, and they should report realized capital gains and losses on each trade, even if the trader doesn’t convert underlying Bitcoin back into U.S. dollars.

It’s similar to having a foreign-based brokerage account in a foreign currency (i.e., Euros), where a trader buys and sells European equities held in Euros, and does not convert Euros back to U.S. dollars during the year. There are two choices for tax reporting: Convert Bitcoin to U.S. dollars on each purchase and sale transaction using the Bitcoin market price that day in U.S. dollars, or use Bitcoin as a functional currency, using an average Bitcoin vs. U.S. dollar conversion rate for the tax year.

Bitcoin and foreign bank account reporting

U.S. residents with a foreign bank, brokerage, investment and another type of account (including retirement and insurance in some cases) who meet reporting requirements must e-file FinCEN Form 114, Report of Foreign Bank and Financial Account.

If the aggregate or combined value of all of your foreign bank accounts is $10,000 (USD) or greater for the entire tax year, you must report these accounts on an FBAR because you have eclipsed the threshold for filing FinCEN Form 114.

Just like foreign account holders don’t have to report precious metals in offshore safe deposit boxes, the conventional wisdom was that taxpayers also don’t have to report Bitcoin in virtual wallets. This was the view that IRS analyst Rod Lundquist espoused in June 2014, a date that seems like light-years ago now. 

A lot has changed since then. While the IRS allowed taxpayers to exclude Bitcoin from their 2013 foreign bank account filings, it’s not clear if the IRS continues to allow an exclusion of Bitcoin, or Bitcoin derivative contracts on current year FinCEN 114 filings. When in doubt, due to the staggering penalties for non-compliance, I recommend including these Bitcoin accounts on FinCEN 114.