Owning bitcoin (or other cryptocurrencies) could affect your expat taxes in some ways you may not expect. We’ve asked the experts to weigh in on the matter and summarized their responses below.
What Bitcoin Is and Is Not
Bitcoin is often in the news as of late, leaving many to wonder: What is bitcoin? The answer is not simple, but in short, bitcoin is a “currency” generated apart from central banks that can be used anonymously and cheaply, as it is not subject to credit card fees or regulation – comparable to digital cash. The value of bitcoin blew sky high for a while, begging the question of whether it is a currency or an investment. However, in the context of taxes, the IRS has decided that bitcoin will be treated as a capital asset (like a share of stock) rather than a currency. In short, when you sell your bitcoin, the taxes will fall under capital gains rules.
IRS Guidance on Bitcoin
Since cryptocurrency is a newer phenomenon, the IRS has not provided guidance on a lot of the issues yet. One of the gray areas is whether or not taxpayers should report offshore cryptocurrency accounts on their Foreign Bank Account Reporting (FBAR / FinCEN 114) if the account meets the $10,000 threshold. Some experts are recommending that taxpayers take precautions and report it, since if they do not, they could be surprised with accusations of willful nondisclosure. If you are found to have willfully hidden your offshore accounts, you could face penalties of $100,000, or 50% of what is in the account – whichever is greater! Reporting your account on your FBAR is not a taxable event, but failure to report it could lead to penalties. Expats would almost certainly need to report it on FATCA Form 8938, assuming the value surpassed the filing thresholds.
New Sentencing Policy for FBAR Cases
Further complicating the issue the Justice Department’s Tax Division has newly implemented a change in their sentencing policy. Taxpayers who are prosecuted due to hidden overseas bank accounts typically are charged with two felonies: one for the tax violation, and one for failure to file the FBAR. In the past, the sentencing guidelines for tax violation were often used in these instances – resulting in a lenient sentence. In October 2017, the Justice Department announced that in the future the FBAR sentencing guidelines will be used, meaning harsher sentences will be imposed.
The Offshore Voluntary Disclosure Program (OVDP) is Ending This Year
The IRS recently announced that they are terminating the OVDP this year. The IRS created the OVDP as an amnesty program to help taxpayers hiding foreign assets become tax compliant without facing criminal prosecution. However, the last day this program is available will be September 28, 2018. After that, anyone willfully hiding foreign assets will not be able to avoid prosecution.
Put ‘Em Together and What Have You Got
The American tax code is many things, but it is not intuitive. Expats are often surprised by the fact that they still have tax reporting requirements years after they moved to a new country. Since bitcoin is a new development in the tax world, it may not occur to some taxpayers to report profits realized from the cryptocurrency or report account balances via the FBAR and FATCA. The nightmare scenario would be an expat, unaware of filing obligations, found to have willfully hidden foreign assets and then subjected to huge penalties with criminal prosecution as the cherry on top.
But Don’t Panic
Expats who have not voluntarily disclosed overseas accounts and/or bitcoin profits shouldn’t panic yet! If you willfully failed to file and/or report your accounts you have until September of this year to become compliant without facing criminal prosecution. If your failure to file was non-willful, you can use Streamlined Filing Procedures, which will drastically reduce the amount of penalties levied. The best course of action is to speak with an accountant familiar with FBAR and expat reporting requirements as soon as possible.
Contact Greenback Today!
Greenback accountants are familiar with the many moving parts involved in expat taxes. Contact us today, and get your questions answered!