FinCEN is moving rapidly for reporting crypto currency and assets.
Reporting Virtual Currency on FBARs
On December 31, 2020, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) in a notice stated it intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) on IRS FinCEN Form 114 to include virtual currency as a type of reportable account under 31 C.F.R. § 1010.350.
At present, FBAR regulations do not define a foreign account holding virtual currency as a type of reportable account. As a result, a person with a foreign account holding virtual currency need not report such as holding on the FBAR unless it is a reportable account under 31 C.F.R. § 1010.350 because it holds reportable assets in addition to virtual currency.
It remains to be seen how virtual currency will be reported on the FBAR. Because FBAR penalties may be as high as 50 percent of an account’s highest balance per violation, the stakes are high.
Meanwhile, the Internal Revenue Service 2019 Form 1040 Schedule 1 added a question, inquiring whether taxpayers received, sold, sent, exchanged, or acquired a financial interest in virtual currency. The recordkeeping for tax purposes alone on virtual currency is very challenging.
On December 31, 2020, the IRS issued draft instructions on what constitutes reportable virtual currency transactions. The instructions provide more guidance than did the previous version released October 23, 2020. However, many tax attorneys have criticized the new guidance.
Recordkeeping on Crypto Wallets
FinCEN will propose to amend the regulations implementing the Bank Secrecy Act (BSA) concerning reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.
On December 23, 2020, FinCEN issued a notice of proposed rulemaking requesting public comments on a proposal to require banks and money service businesses (“MSBs”) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (“CVC”) or digital assets with legal tender status (“legal tender digital assets” or “LTDA”) held in unhosted wallets or held in wallets hosted in a jurisdiction identified by FinCEN. FinCEN is proposing to adopt these requirements pursuant to the Bank Secrecy Act (“BSA”).
FinCEN proposes to prescribe by regulation that CVC and LTDA are “monetary instruments” for purposes of the BSA. However, FinCEN does not propose to change the regulatory definition of “monetary instruments” or otherwise alter existing BSA regulatory requirements applicable to “monetary instruments” in FinCEN’s regulations, including the existing currency transaction reporting (“CTR”) requirement and the existing transportation of currency or monetary instruments reporting requirement.
FinCEN is providing a 15-day period for public comments with respect to this proposed rule.
Although there are many important technical and procedural issues, including whether Treasury is affording sufficient time for comments on the new regulations, the bottom line is that Treasury and other law enforcement agencies believe significant amount of crime is occurring due to the lack of transparency surrounding virtual currencies and digital assets, especially in international transactions.
The current issue of the IELR will have a more comprehensive discussion of these two regulatory initiatives.
 See 31 CFR 1010.350(c).
 Kirstin Parillo, New Draft 1040 Instructions Add More Crypto Details, Tax Notes Today Int’l 2021 TNTI 5-3, Jan. 8, 2020.
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