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Virtual currencies and offshore account reporting requirements

Reporting requirements for offshore accounts continue to grow in complexity. As we have discussed before, much of this is due to the Foreign Account Tax Compliance Act (FATCA), which imposed sweeping new obligations that affect not only U.S. taxpayers, but also foreign financial institutions.

Many U.S. taxpayers living abroad have given up their citizenship rather than comply with the increasingly complicated reporting obligations for foreign accounts. As we noted in our July 7 post, passport renunciations by U.S. citizens and holders of green-card status are up this year.

In today’s post, we will take note of another aspect of the increasing complexity of offshore reporting obligations. We will discuss the question of whether Bitcoin and other virtual currencies must be reported to the IRS.

The issue applies to both FATCA and the Report of Foreign Bank and Financial Accounts (FBAR). The FBAR form is also known as FinCEN 114.

Whether virtual currencies on foreign exchanges have to be reported on these forms is far from settled. But it is quite possible that the IRS will take the position that Bitcoin and similar accounts are to be included among the foreign assets that are subject to U.S. reporting mandates.

Indeed, there is even speculation that the IRS could characterize digital currency exchanges as foreign financial institutions (FFIs). Such a characterization would impose reporting obligations not only on taxpayers, but on the exchanges themselves.

It is too soon to say how this will play out in practice. But clearly the trend toward more complicated offshore account compliance continues.

Source: Bloomberg BNA, “Bitcoin Accounts May Be Subject to FBAR, FATCA Reporting,” Nov. 13, 2014

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