With the emergence of digital assets, the question has arisen whether digital assets held in “wallets” in foreign exchanges need to be reported on Internal Revenue Service (IRS) Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is the IRS counterpart for the FBAR, or Foreign Bank Report, which certain holders of foreign bank accounts must file with FinCEN. Form 8938 was added as part of the HIRE Act at the same time the Foreign Account Tax Compliance Act (commonly known as FATCA) was adopted in 2010. The penalty for a failure to file Form 8938 is $10,000. However, it is not clear that Form 8938 applies to digital assets.
The answer requires one to dig through the underlying statutes and the instructions to Form 8938. We start with Internal Revenue Code Section 6038D, which requires reporting of “specified foreign financial assets.” Under Code Section 6038D, a “specified foreign financial asset” is (1) a financial account maintained by a foreign financial institution and (2) one of the following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution: (a) any stock or security issued by a person other than a United States person; (b) any financial instrument or contract held for investment that has an issuer or counterparty other than a United States person, and (c) any interest in a foreign entity. The term “financial account” means, with respect to any financial institution, (a) any depository account, (b) any custodial account and (c) any equity or debt interest in such financial institution (other than interests regularly traded on an established securities market).
One issue for digital asset holders is whether a person who holds such assets in a wallet maintained at a foreign exchange is holding an asset in a “foreign financial institution.” What is a financial institution? This is defined in Code Section 1471(d)(5) as an entity that (a) accepts deposits in the ordinary course of a banking or a similar business, (b) as a substantial portion of its business, holds “financial assets” for the account of the others, or (c) is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interests in such securities, partnership interests or commodities. A foreign financial institution includes investment vehicles such as foreign mutual funds, foreign hedge funds and foreign private equity funds. Very generally, financial assets are securities, commodities, notional principal contracts, insurance contracts, or annuity contracts or interests in any of the foregoing. Both the terms “security” and “commodity” are defined by reference to Code Section 475, a section of the Code that was adopted in 1993, preceding the emergence of digital assets. For example, gold is a commodity under this provision, and anyone holding gold in an offshore account would need to report the account. Should the same rules apply to bitcoin or bitcoin gold held in a wallet in an offshore exchange? The IRS has not yet taken a position on whether cryptocurrency is a security or a commodity, which it could do by a regulation or a notice. This is key to the analysis of whether or not the crypto exchange is a foreign financial institution.
At least one recent, unofficial statement provides insight into the IRS’s thinking on the reporting obligation on Form 8938. Recently, according to Tax Notes, an IRS official was asked if the IRS will assess penalties against taxpayers who haven’t been disclosing digital assets on Form 8938, and the official responded that, if taxpayers had been reporting taxable cryptocurrency transactions on their returns during prior years and properly filed Form 8938 going forward, the IRS probably would not pursue them for prior tax years. Of course, this is merely an unofficial statement, and the IRS could formally decide otherwise or examiners could take different positions during the course of an exam. Either way, taxpayers that have not been reporting their cryptocurrency transactions should file Form 8938 as soon as possible and consider filing amended returns.
Information reporting is certainly a key issue for the IRS that will drive the tax compliance process. In a sign of the attention that the IRS is giving to the reporting, the draft version of IRS Form 1040, Schedule 1, now includes a question regarding financial interests in “virtual currencies,” much like the question relating to ownership of foreign bank accounts presently on Schedule B.
FAQs
The IRS requires foreign-held or -acquired cryptocurrency to be reported on Form 8938.
What is the IRS 8938 filing requirement? ›
You have to file Form 8938. You own both the specified foreign financial asset owned by the disregarded entity and the specified foreign financial asset you own directly, for a total value of $55,000. You satisfy the reporting threshold of more than $50,000 on the last day of the tax year.
What is the exception to filing Form 8938? ›
Not all foreign assets need to be reported on Form 8938. These exceptions include: Assets reported on other forms. If a foreign asset is already reported on other IRS forms, such as Form 3520 (for foreign trusts) or Form 5471 (for foreign corporations), it may not need to be reported again on Form 8938.
What is the threshold limit for 8938? ›
The threshold reporting amounts are based on the fair market value of the assets. For those filing single or married filing separately, an IRS Form 8938 is required if the individual either has $50,000 of specified foreign financial assets at the end of the tax year or $75,000 at any time during the tax year.
What exchange rate to use for form 8938? ›
You must convert the maximum account value for each account into United States dollars using the Treasury year-end exchange rate. If no Treasury Financial Management Service rate is available, use another verifiable exchange rate and provide the source of that rate.
Will the IRS know if I don't report my crypto? ›
If you've undergone a know-your-client process with exchanges like Binance.US or Coinbase, the IRS can track and associate your crypto activity with you. To avoid potential complications, accurately report all crypto gains in your annual filings and work with a crypto tax professional to clarify your tax situation.
What crypto transactions need to be reported to IRS? ›
Disposed, sold, exchanged or transferred ownership of digital assets: For another digital asset. For U.S. dollars or other currency. In exchange or trade for property, goods or services in any amount.
What happens if you don't file form 8938? ›
Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).
Does form 8938 trigger audit? ›
Does filing Form 893 8 trigger an audit? Form 893 8 is not an audit trigger. You will not be audited if you follow the rules and report foreign asse t s. Failure to file may result in an audit.
What accounts to report on 8938? ›
Common examples of having to file Form 8938 include ownership of foreign: Bank Accounts. Securities Accounts. Pooled Fund Accounts (Mutual Funds and ETFs)
The filing of Form 8938 does not relieve you of the separate requirement to file the FBAR if you are otherwise required to do so, and vice-versa. Depending on your situation, you may be required to file Form 8938 or the FBAR or both forms, and certain foreign accounts may be required to be reported on both forms.
What is statute of limitations 8938? ›
If you fail to file Form 8938 or fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for all or a part of your income tax return until 3 years after the date on which you file Form 8938.
How much foreign income is tax free? ›
The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.
What is the difference between form 114 and form 8938? ›
The Foreign Bank Account Report (FBAR), aka FinCEN Form 114, is used to report the balances of foreign banks and financial accounts. Form 8938 (i.e., the Statement of Specified Foreign Financial Assets), in addition to financial account balances, is used to report other types of foreign financial assets.
What is the fair market value of form 8938? ›
You must report the maximum value during the tax year of each specified foreign financial asset reported on Form 8938. In most cases, the value of a specified foreign financial asset is its fair market value. An appraisal by a third party is not necessary to estimate the maximum fair market value during the year.
What is the threshold for filing 8938? ›
Specified Domestic Entities: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
What happens if I have more than $10,000 in a foreign bank account? ›
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
What is the best way to exchange large amounts of foreign currency? ›
You can use a bank or currency broker to exchange large amounts of currency. The cost is a combination of exchange rates and transfer fees. Currency brokers can normally beat the banks in terms of cost.
Is crypto subject to FBAR reporting? ›
Is cryptocurrency considered a foreign asset? Cryptocurrency itself is not inherently considered a foreign asset. However, if it is held in foreign accounts alongside other assets subject to reporting, it becomes part of the aggregate value that determines FBAR and FATCA reporting requirements.
Do all crypto transactions need to be reported? ›
Anyone who sold crypto, received it as payment or had other digital asset transactions needs to accurately report it on their tax return.
Reporting your crypto activity requires using Form 1040 Schedule D as your crypto tax form to reconcile your capital gains and losses and Form 8949 if necessary.
What crypto needs to be reported? ›
Receiving Digital Assets Through Mining, Staking and Airdrops. Income received from mining, staking or airdrops is taxable and must be reported as ordinary income using the fair market value of the cryptocurrency at the time it was received.
