NATIONALLY RECOGNIZED FEDERAL LAWYERS
Last Updated on: 29th September 2023, 08:48 am
How Does the IRS Use the Foreign Account Tax Compliance Act (FATCA) for Cryptocurrency?
The IRS treats cryptocurrencies like Bitcoin and Ethereum as property for tax purposes. This means you may owe capital gains tax when you sell or trade crypto. But how does the IRS find out about your crypto holdings, especially if you use a foreign exchange or wallet? Enter the Foreign Account Tax Compliance Act, or FATCA.
FATCA, which passed in 2010, requires U.S. taxpayers to report foreign assets like bank accounts, stocks, and now cryptocurrency, if they total over $50,000 in value. You report this info on Form 8938 attached to your tax return. If you don’t report, you could face big penalties!
What is FATCA?
FATCA stands for the Foreign Account Tax Compliance Act. It became law in 2010 as part of the HIRE Act. FATCA requires U.S. citizens and residents to report foreign assets like bank accounts, stocks, bonds, mutual funds, and now cryptocurrency if they total over $50,000.
You report this info on IRS Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 gets attached to your annual tax return. The IRS uses the info to make sure you pay any taxes owed on foreign income or assets.
FATCA also requires foreign banks and financial firms to report info on assets held by U.S. citizens and residents. Over 100 countries have agreed to share this financial data with the IRS through intergovernmental agreements.
Why Did FATCA Add Crypto Reporting?
The IRS treats cryptocurrency like Bitcoin as property for tax purposes. This means you may owe capital gains tax when you sell or trade crypto at a profit. You also owe income tax if you get paid in crypto.
But how does the IRS find out about crypto holdings if you use a foreign exchange or wallet? This is where FATCA comes in. By adding crypto to FATCA reporting rules, the IRS can better track crypto assets held overseas by U.S. taxpayers.
According to IRS guidelines, cryptocurrency is now considered a “financial asset” for FATCA reporting purposes. This means crypto must be reported on Form 8938 if you own over $50,000 worth across all foreign exchanges and wallets.
When Do You Need to Report Crypto Under FATCA?
You must file Form 8938 to report your foreign crypto holdings if:
- You own cryptocurrency through a foreign exchange or wallet
- Your total crypto value exceeds $50,000 USD at any point during the tax year
This $50,000 threshold includes all crypto across all foreign exchanges and wallets. For example, if you have $30,000 worth of Bitcoin on Binance and $25,000 worth of Ethereum on a Swiss wallet, you must report because together they exceed $50,000.
You also must file Form 8938 if you own over $50,000 in other foreign assets like foreign stocks or mutual funds. All your specified foreign financial assets get reported on the same form.
What Crypto Info Does FATCA Require?
If you cross the $50,000 FATCA threshold for crypto, you must report the following information for each foreign exchange or wallet:
- Name and address of the foreign exchange/wallet
- Account number or wallet address
- Maximum value of cryptocurrency during the year
You need to provide this information on Form 8938. You can get the maximum value for each wallet by checking historical crypto prices for the year.
In the future, the IRS may require more detailed reporting like which specific coins you hold and cost basis info. But for now, FATCA only asks for aggregate value by foreign wallet.
What Are the Penalties for Not Reporting Crypto on Form 8938?
The penalties for not reporting foreign crypto holdings on Form 8938 can be severe. According to IRS rules, you may face:
- $10,000 penalty for failing to file Form 8938
- 40% penalty on any underpaid tax related to non-reported crypto
The IRS can also prosecute criminal charges for tax evasion if you intentionally don’t report offshore crypto holdings. Fines can reach $250,000 and there may be up to 5 years in prison for tax evasion.
But if you make an honest mistake, the IRS may waive the first-time failure to file penalty. You need to show reasonable cause for missing the filing deadline.
How Does the IRS Find Out About Foreign Crypto?
Even if you “forget” to report foreign crypto holdings, how would the IRS know? According to tax attorney Allen Barron, the IRS has three main ways to get foreign crypto info:
- Foreign Bank Data – FATCA requires foreign firms to report on assets held by U.S. taxpayers
- Exchange Data – U.S.-based exchanges like Coinbase report data to the IRS
- Taxpayer Reporting – IRS forms like FBAR and 8938 require taxpayers to self-report foreign assets
So even if you hold crypto on a Swiss exchange, FATCA agreements mean the IRS may find out. And if you transfer back to a U.S. exchange, that data gets reported too.
How Can You Avoid FATCA Penalties?
The best way to avoid severe FATCA penalties is to closely track your foreign crypto holdings. If you exceed the $50,000 threshold at any point during the tax year, be sure to file Form 8938 with your return.
Consider using crypto tax software that can aggregate your holdings across wallets and alert you if totals exceed reporting limits. Some software even auto-generates Form 8938 for you based on your transaction history.
You can also move crypto off foreign exchanges into cold storage wallets. This keeps holdings under reporting limits. Just be sure you still track taxable events like selling, trading, or spending crypto.
Does FATCA Apply Retroactively?
FATCA reporting requirements for crypto only took effect in 2022. But some wonder if the IRS will penalize past non-reporting of foreign crypto holdings.
According to tax experts, FATCA does not apply retroactively. The IRS so far has indicated Form 8938 reporting only applies for 2022 forward. You cannot face penalties for not reporting foreign crypto in previous tax years before rules took effect.
However, you still must report past crypto transactions for capital gains tax purposes on Form 8949. FATCA does not replace standard capital gains reporting requirements.
How Does FATCA Compare to FBAR Crypto Reporting?
FATCA isn’t the only IRS reporting law for foreign assets – there’s also FBAR. FBAR stands for the Report of Foreign Bank and Financial Accounts. This older law requires reporting foreign accounts totaling over $10,000.
Both FATCA and FBAR now apply to cryptocurrency held on foreign exchanges. So if your foreign crypto exceeds $10,000 you must file FBAR. And if it exceeds $50,000 you must also file Form 8938 under FATCA rules.
Many taxpayers are confused on which rules apply when. A good rule of thumb is to file FBAR if foreign crypto tops $10,000 at any point. And file Form 8938 if it exceeds $50,000.
The Future of FATCA Crypto Reporting
FATCA crypto reporting is still evolving. In the 2022 tax year, Form 8938 filers just had to disclose foreign wallet addresses and maximum account values.
But in future years, the IRS may require more detailed reporting on specific coins held and cost basis information. The Biden administration supports expanding crypto disclosures through FATCA agreements with foreign jurisdictions.
The takeaway is the IRS is ramping up enforcement on foreign-held cryptocurrency. Expect expanded FATCA reporting rules in coming years as crypto tax compliance becomes a bigger focus.