There is tension between the Service’s classification of cryptocurrency as “property,” the Securities Exchange Commission’s (“SEC”) classification of cryptocurrency, in certain circumstances, as a “security,” and the Commodity Futures Trading Commission’s (“CFTC”) classification of cryptocurrency as a “commodity.”
- On the one hand, if cryptocurrency is property, then it is arguably not subject to FBAR reporting requirements because it is not, under the current regulatory definitions, a “bank, securities, or other financial account.”
- On the other hand, if cryptocurrency is a “security,” then FBAR reporting requirements may apply under the general rule: “each United States person having a financial interest in, or signature authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner…”
- Moreover, by treating cryptocurrency as “property,” the answer to whether cryptocurrency held in foreign wallets must be reported likely depends on what functions the wallet provider actually provides, which may be difficult for taxpayers to determine in many cases.
- Furthermore, it is unclear how these requirements may apply to taxpayers who hold cryptocurrencies directly on a distributed blockchain.
In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions.
Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.