The Ultimate Guide to Puerto Rico Crypto Tax

Learn everything you need to know about Puerto Rico crypto tax incentives and why American crypto traders should move to Puerto Rico.

Attention American crypto whales: Puerto Rico crypto tax benefits should be on your radar and here’s why:

You are a young, single, American crypto trader who is currently sitting on a ton of cryptocurrency. You’ve been at this long enough to see your potential to cash in on millions is right around the corner if you play your cards right.  

You have big and very realistic dreams of being a millionaire sitting at your fingertips as many crypto analysts anticipate the next potentially epic bull run is on its way. 

At the same time, you have been terrified by all the hype regarding the IRS crackdown on cryptocurrency.  

You are being advised not to take this crackdown lightly, and you have enough wits to know you must take these warnings very seriously by educating and preparing yourself for what’s to come. 

But, knowing that you may not have reported your past earnings correctly is sending you into a full-blown panic most days. 

You are worried about the IRS coming after your crypto earnings. And, you’re looking to save money on your tax bill.  

However, your biggest concern is making it big when the time comes to cash in your crypto.   

The best time to move is before your cryptos go up. You want the gains to increase as you are in Puerto Rico.

Your cryptos have a gain as of now, and let’s say you move to Puerto Rico today and expect them to get much higher. 

Suppose you wait until bitcoin hits $100,000. All the gain is taxed at US tax rates.

If you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act now to establish your bona fide residency.   

The date you enter Puerto Rico later becomes the date you are considered a bona fide resident of Puerto Rico. 

Therefore, the gains in your crypto up until that date are still taxed by the US when sold. 

After that date, the gains in your cryptos are considered Puerto Rican sourced income and taxed at a 0% capital gains rate.  

Let’s put this all together.  

If you had a Bitcoin, you bought in 2019 and then sold in 2022 after you’ve become a Puerto Rican resident, part of the gain is taxable by the US, and the rest of the gain is taxed by Puerto Rico.  

You want to move to Puerto Rico before your coins go to the moon!

We will explain why crypto traders are moving to Puerto Rico to cash in on special tax incentives and why you need to take action now to take advantage of these tax benefits.     

Our goal is to help get you in front of this problem/opportunity, not to be the last one behind it. Read on to find out what you need to understand about Puerto Rico’s tax opportunity and how to prepare for it as of today.  

Tell Me More About The Fantastic Opportunity For Puerto Rico Crypto Tax Savings

Puerto Rico Crypto Tax

The chances are high that you’ve heard about the fantastic opportunity for US citizens relocating to Puerto Rico to reduce their corporate tax to 4% and to reduce their personal income tax on capital gains to 0%. 

You have a general understanding that Puerto Rico could be your golden ticket to savings on your tax bill. 

And you are beginning to see that the tax-free benefits of that big crypto cash out everyone is anticipating could lead to early retirement if you are living in Puerto Rico when the next bull run hits. 

Still, you are not exactly sure how you qualify for this tax saving act.

You are also unclear about the severe lifestyle changes that will need to be considered.

And most importantly, you have no idea how to prepare.  

Read on to find out how you can qualify, the lifestyle changes that you will need to consider, and how to start preparing now to make it a reality.  

We will explain why crypto traders are moving to Puerto Rico to cash in on special tax incentives and why you need to take action now to take advantage of these tax benefits.     

Our goal is to help get you in front of this problem/opportunity, not to be the last one behind it. Read on to find out what you need to understand about Puerto Rico’s tax opportunity and how to prepare for it as of today.  

I Want To Understand Puerto Rico Crypto Tax To Save Money On My Crypto Taxes In 2021 And Beyond​

Puerto Rico Crypto Tax

How Do I Save Money On My Crypto Tax Bill?

If you’re looking to save money on your tax bill, you might want to consider relocating to Puerto Rico as soon as possible.

There is no tax benefit until you arrive.

Because while you may not be unable to change how government regulators will decide to tax cryptocurrencies, you can change your tax future!  

Moving to Puerto Rico will allow you to take advantage of Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019), formerly known as Act 22, to pay no federal income tax from here out. 

We know that saving money on your taxes is about one of the most substantial risk-adjusted returns.    

When is the best time to move to benefit from Puerto Rico Crypto Tax?

The best time to move is before your cryptos go up. You want the gains to increase as you are in Puerto Rico.

Your cryptos have a gain as of now.

Let’s say you move to Puerto Rico today and expect them to get much higher. 

Suppose you wait until bitcoin hits $100,000 then all that gain is taxed at US tax rates.

If you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act now to establish your bona fide residency.   

The date you enter Puerto Rico later becomes the date you are considered a bona fide resident of Puerto Rico. 

Therefore, the gains in your crypto up until that date are still taxed by the US when sold. 

After that date, the gains in your cryptos are considered Puerto Rican sourced income and taxed at a 0% capital gains rate.  

Let’s put this all together.  

If you had a Bitcoin, you bought in 2019. 

And then sold in 2022 after you’ve become a Puerto Rican resident.  

Part of the gain is taxable by the US, and the rest of the gain is taxed by Puerto Rico.  

You want to move to Puerto Rico before your coins go to the moon!

Can I Move To Puerto Rico To Avoid Taxes?

You can avoid tax by moving to Puerto Rico through one of the tax programs, formerly named Act 22 (now referenced as Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019). This Act requires that you have NOT lived in Puerto Rico during the previous 15 years. Therefore, allowing you to take advantage of a 4% income tax rate, 0% dividend rate, and 0% capital gains tax rate. 

Please be aware that BOTH YOU and YOUR BUSINESS need to make a literal move to Puerto Rico. It has to become your “tax home.” Later, we talk about making closer connections to Puerto Rico than the United States. 

Why Should You Move To Puerto Rico?

Act 22 was born as the Resident Individual Investor Act. It was enacted in Puerto Rico in 2012 to promote the relocation of high-net-worth individuals to Puerto Rico. The law’s goal was to provide attractive incentives to encourage investors to relocate to Puerto Rico. 

It has since been updated and bundled with other popular tax incentives and now called Act 60-2019, replacing the name Act 22 into law on July 1, 2019, with an effective date of January 1, 2020. 

*Please also note that new applicants will be subject to the most recent requirements from January 1, 2020.  

Puerto Rico has a unique tax status.   

It is a US territory, but it is viewed as a “foreign country” for US federal income tax purposes. 

Therefore, an individual tax applies to its residents and tax incentives geared to promote its economic development that may be very luring for US Crypto Traders.

If both you (as a bona fide resident) and your business (as your tax home) move to Puerto Rico—

“Then all your future capital gains on stocks, bonds, and other assets as defined to include commodities, currencies, and any other digital asset or blockchain technology, a.k.a. Crypto becomes tax-free.

In short, all your dividends, interest, and royalties you may receive from Puerto Rican sources become tax-free.” (1)

What Was Puerto Rico’s Act 22, And What Is It Called Now?

Puerto Rico’s Act 22 was the Act to Promote the Relocation of Individual Investors to Puerto Rico. It has since been updated and bundled with other popular tax incentives and now called the Puerto Rico Incentives Code (Act 60-2019) referenced in Chapter two. It is replacing the name Act 22 with Act 60-2019 as the law on July 1, 2019, with an Effective Date of January 1, 2020.  

*You will be obliged to follow the most recent requirements applying as a new bona fide resident.

It intended to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all interest and dividends earned AFTER the individual becomes both a bona fide resident of Puerto Rico. Along with filing their business in Puerto Rico, as their tax home.

What Are The Benefits Of Chapter Two Of Act 60-2019, Formerly Known As Act 22?

  • 100% tax exemption on interest and dividends derived, AFTER becoming a Puerto Rico resident and through December 31, 2035. (2)
  • 100% tax exemption from Puerto Rico income taxes on all capital gains accrued, AFTER establishing residency. (2)
  • 100% tax exemption concerning gains from the sale of property acquired AFTER the individual becomes a bona fide resident of Puerto Rico if the sale takes place before January 1, 2036. (2)
  • Investment income accrued before becoming a bona fide resident of Puerto Rico will be taxed at 10% if realized within ten years after residency is established. If the gain is achieved after the ten years, but on or before December 31, 2035, the tax is 5%. (2)
  • Capital gains appreciation on investments that occur after becoming a bona fide Puerto Rico resident can allocate to Puerto Rico.

Special rules apply to the gain from the sale of securities acquired before establishing residence in Puerto Rico.

We asked Juan Robles, CPA Partner Etrends Group, about these special rules. 

Robles states that:

“Any appreciated property acquired in the US and later sold while a PR resident will still have US tax implications. For US tax purposes, virtual currency is treated as property, and US Regulation Section 1.937-2(f) provides that any gain may be subject to an allocation based on holding period (bifurcation rule)”  

What Is Act 60-2019?

“The Governor of Puerto Rico signed into law the Puerto Rico Incentives Code as Act 60‐2019 (the “Incentives Code”). In general, the Incentives Code compiles into a single code many of the Puerto Rico tax incentives laws used to promote the island’s economic development, with some modifications, to establish a new transparent and efficient process for granting and overseeing all the incentives afforded under the Puerto Rico’s incentives laws. 

The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including Act 20, the Promotion of Export Services Act, and Act 22, the Act to Promote the Relocation of Individual Investors to Puerto Rico.” (3)

I Want To Understand The Lifestyle Changes That I Need To Consider By Moving To Puerto Rico.

Puerto Rico Crypto Tax

I’m not a crypto billionaire. Do Puerto Rico’s tax incentives still make sense for me?

Yes! You may not be a crypto billionaire yet, but plenty of you are sitting on a lot of crypto that you want to sell when it’s worth it. Many crypto traders are going to Puerto Rico with the anticipation of becoming a crypto billionaire.  

Cryptocurrencies and other crypto assets are explicitly included as eligible for tax exemption.

And, there is no better risk-adjusted return than saving money on taxes. Gain an extra 30% return on investment without the risk by saving on your taxes. Compounded over your lifetime, that is a considerable amount of savings for changing nothing but the place you legitimately call home.

Do You Have To File Taxes If You Live In Puerto Rico?

Yes, residents of Puerto Rico pay federal payroll taxes, such as Social Security and Medicare taxes.  

“PR source income earned by US citizen or resident alien is excluded from US taxes (US Code Section 933 exclusion)” 

-Juan Robles, CPA Partner Etrends Group

“Any PR resident that has US source income must file federal taxes.”

-Juan Robles, CPA Partner Etrends Group 

I Want To Start Preparing Now To Make Saving On My Puerto Rico Crypto Tax A Reality.

Puerto Rico Crypto Tax

What Is The First Action Step To Take?

The first and most critical step is wrapping your head around how fast you have to make this happen if Puerto Rico is the right move for you.  

You want to be a bona fide resident of Puerto Rico to save on your tax bill.

Crypto Traders need to understand what rules they need to comply with to take advantage of this opportunity legally.

  • They must understand that they will be selling and rebuying their crypto. For more information, consult Donnelly Tax Law.
  • They must thoroughly understand residency compliance and form a closer connection to Puerto Rico than to the US For more information, consult the Etrends Group in Puerto Rico.

How Can You Prepare For This Move To Puerto Rico?

  • You must become a bona fide resident of Puerto Rico.
  • You must prepare to unload your Crypto (You have to turn it over.) Meaning, you will sell it and immediately repurchase it as a bona fide resident of Puerto Rico.
  • You must create closer connections. Meaning, you must create “closer connections” to Puerto Rico than the United States.

Does A Crypto Trader Have To Rebuy His Inventory Of Coins Upon Becoming A Bona Fide Resident?

The short answer is YES if he wants to enjoy Puerto Rico’s 0% capital gains rate. Under Act 22, the 0% cap gain tax rate only applies to assets bought AFTER becoming a bona fide resident of Puerto Rico. Assets acquired before to receive a 15% tax rate.

What Does This Mean To The Potential Crypto Trader Considering Moving To Puerto Rico?

1) The 0% rate only applies to assets purchased after becoming a bona fide resident. That is when you receive the official designation from Puerto Rico of long term residence status and after the 183 days of residence have been completed.

If, after that date, the trader sells his inventory of coins and repurchases them promptly, he will incur the Puerto Rico 15% tax on any capital gains realized in this sale. The trader might pay some hefty capital gains taxes this first year in Puerto Rico.

Hey, the US long term capital gains tax is 15% (for everyone except those in the highest tax bracket). You don’t need to move to Puerto Rico to get that rate. Of course, there is a 3.8% Net Investment Income Tax (NIIT).

This repurchase is NOT a requirement of US tax law. Under US law 26 CFR 1.862-1. Personal property sold in Puerto Rico is considered Puerto Rico income as far as the US is concerned.

Why Do Crypto Traders Have To Move To Puerto Rico By July 2, To Take Advantage Of The Particular Act 22 Treatment?

Suppose you expect to sell crypto and avoid taxes on your tax bill. In that case, you need to act and be physically present and living in Puerto Rico for AT LEAST 183 days during the taxable year to establish yourself as a bona fide resident of Puerto Rico to qualify.

You will need the time (and a good amount of money) to apply to become a bona fide resident. Prepare to give yourself about six months.

Give yourself a week’s time to complete the basic information on your application and get your criminal record issued from the state.

Give yourself an additional five months for the government portion (but please be rest assured that your residency status is back-dated to the original filing date). 

How Long Do You Have To Live In Puerto Rico To Be A Bona Fide Resident?

Generally, you must reside there for at least 183 days a year. There are many grey areas and nuances that you want to be clear on if you will take this step, so be sure to position yourself with the right team of crypto tax law and Puerto Rico tax experts from the start. You also have to do the paperwork, applying with the tax authority there.

An Act 22 Decree application must include the payment of a $750 filing fee, but do expect to invest thousands more into applying and relocating yourself here.  

What Is A Bonafide Resident Of Puerto Rico?

A bona fide resident of Puerto Rico can exclude their Puerto Rico source income from US federal tax. Generally, under IRS §937 and the regulations thereunder a bonafide resident of Puerto Rico is an individual who:

You must qualify as a bona fide resident of Puerto Rico FOR THE ENTIRE TAXABLE YEAR for the US IRC’s purposes and (2) the income must constitute Puerto Rico source income under the US IRC.

Please note the wording to qualify for the exclusion for a taxable year. You must be a bona fide resident of Puerto Rico for the “Entire Taxable Year.” 

You will have to have been in Puerto Rico one full taxable year. 

Again, you must generally be physically present and living in Puerto Rico for AT LEAST 183 days during the taxable year.

You must not have a tax home outside of Puerto Rico during the taxable year.

You must pay an annual charitable contribution for a non-profit entity of $10,000. It must be paid annually under the new Act 60-2019.

You must purchase property in Puerto Rico within two years of obtaining the decree under the new Act 60-2019.   

This property must be your primary residence throughout the validity of the decree. You must hold exclusive and complete ownership of the residential property for the duration of the decree. Joint ownership with your spouse qualifies. 

You cannot rent the property out to someone else.  

The determination of whether or not an individual is a bona fide resident of Puerto Rico for a taxable year is made according to rules outlined in the regulations issued under Section 937(a) of the US IRC.

You must not have a closer connection to the United States or a foreign country than Puerto Rico.  

How Do I Create Closer Connections To Puerto Rico?

For example, 

  • Where is your bank account?  
  • Where is your driver’s license?  
  • Where are your relevant documents located?   
  • Where is your high school diploma? Your college degree?  
  • Where are your wife/husband and children living?  
  • Where does your mail go?
  • Where are your investments?  
  • Where do you own your house?

If you have answered the US, you have not created closer connections to Puerto Rico than the US Make sure that you are moving your real life to Puerto Rico.  

There are various factors that the individual must meet to qualify as a “bona fide resident of Puerto Rico.” 

They can be extraordinarily intensive, and a variety of factors will be considered.

Therefore, individuals seeking to take advantage of these benefits should consult with our Crypto Tax Specialist, Clinton Donnelly, and Puerto Rico Tax Experts Etrends for clarity and guidance.  

What Is Law 40-2020?

On April 16 Puerto Rico Governor Wanda Vazquez approved, Law 40-2020, that alters the way tax incentives are provided to new residents. The previous annual fee of $300 for those who moved to the island and applied for the incentive has been substantially increased. It has now jumped up to $5,000. A new tax contribution deduction is equal to 3% for anyone who earns $100,000 or less.  (5)

“There is some lobbying going on related to the increase of the filing fee charge. As it stands today (May 25, 2020), it applies to all Act 22 holders.

The additional 3% income tax reductions apply to tax years 2020 and forward.” – Juan Robles, CPA Partner  Etrends Group

To summarize total costs, including Law 40-2020:

Now, for anyone wishing to move to the island, the upfront expenses are much higher, somewhat negating the existing tax incentives. There is a $750 filing fee, a $5,000 “special fund fee” if the filing application is approved, a $10,000 obligatory annual contribution (with the possibility of having the fee made in two payments), and the new $5,000 fee. (5)

On the bright side, conditions for Act 20, known as the Export Services Act–now part of Chapter 3, Incentives for Export Services– remained largely the same. (1)

Under the new rules, If your Act 20 company churns $3,000,000 (or more) of revenue a year, you will need to employ a full-time employee in Puerto Rico. And that single employee can be you actively managing your business. (1)

What Does A  Membership Do To Protect You From The IRS In Puerto Rico And On The Mainland?

Just because you are in Puerto Rico doesn’t mean you are exempt from US audits. As long as you are a US citizen, you do not escape the eye of the IRS.

Regardless of where you live in the world, you need to file an income tax return with the US as a citizen of the United States. Going to Puerto Rico doesn’t mean you don’t have to file a US income tax. 

If you make less than $12,000, you don’t have to file a tax return. But, if you are still making an income above $12,000 worldwide after subtracting Puerto Rican income, you will have to file a tax return in the US. 

Therefore, you want assurance that you have crypto representation should you get the IRS’s dreaded letter.  

Our goal is to help get you in front of this problem/opportunity by using annual tools like CryptoTaxAudit to provide you with representation as long as you are a member should you need representation with the IRS.

Crypto.Tax.Audit

Well done! By reading this post, you have already taken the first step toward understanding an excellent solution to protect your future Crypto earnings in light of the current IRS crackdown on Crypto earnings.  

You have also come one step closer to having an action plan to realize your dreams of becoming a Crypto millionaire when the next potential epic bull run hits.

Your potential to cash in on millions is right around the corner if you play your cards right.  

Remember, if you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act by July 2 to get your 183 days in Puerto Rico.

Our goal is to help get you in front of this problem/opportunity by using Crypto Tax Audit tools to provide you with representation should you need it with the IRS.  

Donnelly Tax Law is the leading US tax firm for preparing complex US tax returns for Americans, including Crypto Traders and people with foreign assets. 

We are currently partnering with a Puerto Rican tax and accounting firm, Etrends Group, for Act 22 clients

Sign up for our newsletter and get our free download This Deadly Crypto Mistake Could Cost You $10K!.

IRS History With Crypto – The Crypto Tax Webinar: Part One

Learn about IRS history with crypto, the current policies regarding crypto-taxation, and review the IRS crypto letters and their different implications.

Learn about IRS history with crypto in this transcribed Crypto Tax Webinar. Presented by Clinton Donnelly and sponsored by Accointing.

We will talk about where the current state of cryptocurrency reporting is for taxes and break down the IRS history with crypto.

In the full live webinar, we covered:

  1. How to deal with COVID 19: Paying Crypto Taxes On An Installment Plan
  2. The current on-going policies regarding crypto-taxation
  3. What are taxable events and how to handle them
  4. The sent IRS letters and the different implications for each of them
  5. The next steps in order to conduct your crypto tax submission
  6. Some opinions from a top Crypto CPA in the market and average estimate of how much you will be paying in taxes
  7. An idea on how to estimate your taxes with a crypto tax tool 

PART ONE: IRS History With Crypto

In Part One, we’re going to discuss the tax guidance the IRS has created to report cryptocurrencies and breakdown what those activities have been in the IRS history with crypto. 

We will look at what type of enforcement the IRS is doing and review how they’re slowly increasing the level of implementation in how they’re going after people. We’ll also explore some IRS letters that they sent out.

About The Presenter

IRS history with crypto

I’ll tell you a bit about myself. My name is Clinton Donnelly. I’m an enrolled agent, but I have an advanced law degree specializing in international financial regulation and taxation. I specialized in foreign reporting and crypto reporting for many years. 

I have some of the largest clients out there, with tens of millions in crypto investments, complex reporting obligations, and anti-money laundering reporting needs. 

And at this point, we’ve helped people reduce their capital gains by over $40 million using like-kind exchange calculations for pre-2018 gains. 

Donnelly Tax Law has done over 850 anti-money laundering forms for crypto traders. 

We’ve also done over a thousand tax amnesty filings to help people avoid penalties for failing to do previous filings with a 100% success rate. We’re very proud of that. 

More importantly, my firm not only prepares tax returns, but we have also created a whole slew of do-it-yourself tools and books, and we now have video courses coming out to help the average person do their taxes and save a lot of money. 

We are one of the few firms that have genuinely defended a crypto investor in a formal IRS audit of their crypto investments. Our background creates some unique insights in terms of what the IRS is doing and how they’re looking at things. 

So I hope to share this with you and that you’ll find it helpful.

About Accointing

IRS history with crypto

Accointing is a tax software package for helping you calculate your income and capital gains. It is tremendously easy to use. It does use APIs and CSV files from crypto exchanges and works with all of the major exchanges.

It’s an exciting tool found at Accointing.com. It has a lot of free features, and it supports over 300 wallets and exchanges. So it’s fully functioning and very affordable. I think it has a powerful reconciliation tool to help you get onboarded and get your transactions loaded, so you can start getting your tax results right away.

What’s the IRS history with crypto so far?

IRS history with crypto

IRS Issued Initial Guidance In April 2014

The IRS has issued initial guidance in 2014 about cryptocurrency reporting of a tax sale. The IRS came out with what they called a notice that defined “what they referred to as virtual currency.” It’s cryptocurrency.

In this notice, the IRS stated cryptocurrencies are to be treated as property. 

We’re going to dig into what their guidance means regarding property.

It’s not called currency; the IRS called it virtual currency. When, in fact, the IRS doesn’t treat it like that.

The IRS Commissioner Made A Statement In February 2018

In February 2018, the IRS commissioner, Charles Retting said that the IRS has, and will continue to have more information about you than you could ever possibly imagine, referring to crypto traders. So they’re working very hard at capturing a lot of data about traders and what their activities are.

The Next Update Was In March 2018

So the next update was in March 2018, Coinbase had been sued and lost in court.  They were being sued by the IRS to turn over information about their account holders of cryptocurrencies.  

In 2014, 2015, and 2016 tax years, only 900 people had reported cryptocurrencies when Coinbase had a customer base of six million. Most of them were Americans. 

At that time, they lost in court and had the turnover, some accounting, account information.

That was the first access to some information the IRS formally got regarding whom the crypto traders are in the US.

This is the big IRS challenge, to identify who the crypto traders are.

IRS Guidance Released In October 2019

In October 2019. The IRS came out with some guidance about how cryptocurrencies should be reported.

These are FAQs. If you go onto the IRS website, IRS FAQ, virtual currency, you will see the guidance. 

It’s a very easy to read explanation about how to treat the tax reporting. However, on some very critical issues, the guidance is a little confusing. 

So, they also came out with a revenue ruling, which was widely criticized, not only in the accounting space but also in the crypto media and Congress. 

The IRS went on to do a presentation at the American Institute of CPA’s, their national convention, which had several faux pas. 

It became grossly evident that the IRS was not listening or understanding the cryptocurrency marketplace. 

The IRS was doing a poor job of getting this advice and guidance to meet the taxpayers’ needs.

March 2020 Crypto Conference With IRS

The IRS  had a conference of crypto corporations in March of this year with all walks of the crypto chasm.

It was a listening session for the IRS to hear what the significant movers and shakers had to say about crypto taxation. And that’s where we are from a guidance point of view. 

There’s not as much guidance as we would like, but there’s adequate guidance for us for the average taxpayer to provide a complete tax return.

What does the IRS history with crypto letters mean?

IRS history with crypto

One of the forms of guidance that the IRS sent out were some letters. 

Let’s look at it in terms of how the IRS did their enforcement. 

We’re going to talk about enforcement and how the IRS is going after people either not reporting or reporting incorrectly. 

The IRS has what they call a compliance campaign, which is the primary way of organizing their activities to go after a specific focus.

They have a cryptocurrency or virtual currency guidance campaign.

July 2019 The IRS Issued About 10,000 Letters

In July and August of last year, 2019, the IRS issued about 10,000 letters to suspected crypto traders. The slide above is showing us that there were three different types of letters.

There are two types: Letter 6174 and Letter 6174A, which is a little longer. These were benign letters to someone saying: you might want to think about how you reported your cryptos. The letters asked, did you report all of it correctly along with some thoughts about how reporting should be done.

The third Letter 6173 was sent to people whom the IRS thought had engaged in criminal activity. So if you got Letter 6173, it’s because you’re on a list of people the IRS believes to have an illegal issue.

Several clients contacted me with Letters 6174 and 6174A, which told me a lot about the IRS.

From a public viewpoint, we all knew that the IRS had some Coinbase data from 2013, 2014, 2015, and 2016. And it turns out that some clients that I worked with who received these letters never dealt with Coinbase. 

So, the IRS found out about them apart from that court case.

I talked to about two dozen clients who received these IRS letters; almost all had at least $900,000 in Bitcoin at the peak in 2017. That tells me that the IRS had done some significant data mining activity, putting together the pieces. And they have a pretty good idea who the crypto traders are in the US.

The fear of a political backlash, particularly from Congress, is what has restricted the IRS from going after all the taxpayers full force. Because when Congress gets angry, particularly the House of Representatives, they cut the IRS funding. 

There’s a real balance here between the IRS and how aggressively they’re going after taxpayers. 

It is my perception that the IRS has mainly focused their efforts on criminal activities: Silk Road types of things, organized crime using cryptocurrencies to launder money in the proceeds of their efforts, this has been mostly what we hear about.

What is the current situation regarding the IRS history with crypto?

cryptos reported on anti-money laundering forms

Several Crypto Traders Received Audits Beginning March 2020

In March 2020, several crypto traders started receiving audits from the IRS. These are formal IRS audits of their tax returns for 2017. The IRS uses the same questions in both examinations. 

I have two copies of the letters. One is my clients, and the other one is from another preparers’ clients. The wording is all the same on both letters. 

Based on these letters, we got a good idea of how the IRS looks at that question during the “gathering portion” of an audit.

IRS Looked For Consultants In May 2020

Just last month, we found out that the IRS was issuing an RFP (Request For Proposal)  to crypto gain calculation services to find services that would act as consultants and do analysis during audits and trial proceeds. 

So the IRS is looking to line up the type of talent they need to go after non-criminal crypto traders, these would be people who have failed to report their cryptos.

Is it tax evasion? Perhaps. 

It is, however, considered neglect. 

Many people in 2017 made a lot of money and didn’t report it because they didn’t know how back then. But, they’ve had enough time to correct that oversight since 2017. 

I just had a client who wanted to fix it. He had never reported in 2017 and wanted to fix that. The IRS has started to hone in on the average investor, and I expect to see a much stronger crackdown continuing.

The IRS issued guidance in the form of a question added to Schedule 1 of your tax return.

Schedule 1 is where taxpayers list income from different sources, and Schedule 1 asks, did you receive sell, send an exchange, or have any financial interest in virtual currencies? This is a yes or no question. Every taxpayer is requested to answer it. But, failure to answer this question exposes taxpayers to liability.

Now, this is fundamentally a perjury trap, because when you sign your tax return, and you may never have read the fine print, you may have never actually looked at the form. But what it says, and I quote, “under penalty of perjury, I have read my return and attached statements and schedules, and it is complete, true and correct to the best of my knowledge.”

So you are swearing that it is complete and it is correct. Meaning that with this question, you’re saying with a yes, or no, I have had cryptocurrencies or have not, and the penalty if you’ve lied is perjury.

My advice is that everybody should answer yes to Schedule 1. Many fear the IRS will come after them because they are trying to develop a database. But what we've seen is the IRS will use this question later to come after somebody.

There’s a similar question on schedule B part three: “Did you have a foreign bank or brokerage account or other financial accounts?” And it was also a yes or no. And the IRS used this in prosecutions after they’ve identified someone they wanted to go after.

So that general fear that people have that, answering yes will prompt the IRS to come after them, is not well-founded. The IRS does not have that much workforce to go after people like that. But I ask that people should all answer yes to this question.

The way that the IRS has defined virtual currency in their notice of 2014-21, says that "any store of value is a virtual currency." And under that definition, basic frequent flyer, miles are a store of value because you can use it to buy the essential things.

Also, if you have a credit card that racks up points that you could buy stuff off the credit card, that too is a store of value. So rather than people being afraid of answering this question in hiding, by saying, no, I think you should check, yes.

You should get your mother to check yes on her form and your aunts.  You should get everybody to check yes. In that manner, you dilute the value of this question in total. It’s all about honesty in the answering of that question. That’s my feedback.

The IRS is lining things up, as they need, in order to prosecute everyone. They have argued that they’ve given everybody enough time. 

In the RFP (Request For Proposal) the IRS sent out to crypto companies requesting consulting work, they specifically use the example of failure to report in 2017.

The IRS is focused on the people who made a lot of money in 2017, regardless of what happens this current year with crypto gains.

Stay Tuned For Part Two of The Crypto Tax Webinar

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Whales Vs. IRS: Powerful Crypto Tax Lessons Learned (With Infographic)

Learn powerful crypto tax lessons by studying what went wrong when two crypto whales went up against the IRS.

Two American crypto whales shine a spotlight on powerful crypto tax lessons learned at the hand of insufficient tax and crypto defense against the IRS.  

Find out how avoidable mistakes and poor advice cost these two crypto whales over 1.3 million dollars in tax debt and penalties. Make sure to review the visual timeline for this 7 million dollar crypto court saga with our infographic featured at the end of this post.

Here is a penalty calculation estimate on the Strashny‘s attempt to get an installment agreement.

crypto tax lessons

Note: The “6651(2)(2)” is what is commonly called the “Failure-to-pay” penalty.

Summary Of Facts

crypto tax lessons

The taxpayers filed their tax return by April 15, 2018, and reported owing just over $1 million in taxes on their crypto gains. They did not pay the taxes hoping instead to pay over time using an IRS monthly installment agreement. The IRS collections office rejected their application because the couple could pay their taxes in full.

The taxpayers escalated the rejection through the IRS appeals process and until finally dismissed by US Tax Court on June 11, 2020.

Basic Crypto Tax Lessons Learned

crypto tax lessons

This court case offers the following basic lessons. But there are also two more powerful lessons to be learned.

  1. The law requires taxes to be paid in full, even if that means selling your crypto assets or borrowing against them. The IRS can seize assets to force taxpayers to pay.
  2. IRS Installment agreements are available for debts under $100,000 because a personal financial statement is not required. This loophole is intended to simplify debt collection. 
  3. Significant interest and penalties pile up while waiting on the IRS and appeals process. While dickering over the installment agreement rules, the initial debt of just over a million dollars grew by $80,000 by the end of 2018. The taxpayers then hired tax lawyers to argue their case before the US Tax Court. The lawyer costs (roughly estimated at over $10,000) are dwarfed by an additional estimated $170,000 in penalties and interest. This was the hidden cost of arguing a weak case in court.

This case offers some powerful crypto tax lessons about how to prepare smarter tax returns.

Powerful Crypto Tax Lessons Learned

crypto tax lessons

Power Lesson #1: The most powerful tool for fixing a tax liability is an amended tax return.

The taxpayers rushed to file their tax return by the April 15th deadline. They never challenged the underlying tax liability. If their return had reported the crypto gains using like-kind exchange treatment, they could have eliminated the entire tax bill. 

There was a lot of confusion in early 2018 (and remains) about how to report taxes on cryptocurrency income. If a doctor told you he had to cut off your arm, wouldn’t you get a second opinion? 

Power Lesson #2: Like-kind exchange is a potent tool for crypto investors to reduce or eliminate their pre-2018 crypto tax liabilities.

During the run-up of 2017, most traders thought that crypto-to-crypto trades shouldn’t be taxed until cashed out. Like-kind exchange treatment does exactly this. The cumulative gain on crypto-to-crypto trades is deferred until finally traded for cash.

If this taxpayer’s 2017 return was amended to use like-kind exchange, the taxes owed would be reduced to near zero, and over $250,000 in cumulative penalties and interest would be erased. This is the power of an amended return.

Most crypto traders in 2017 didn’t even report their crypto transactions thinking that like-kind exchange was automatic. It wasn’t. All trades claiming like-kind treatment must be reported on Form 8824. If not reported, then there is no like-kind exchange treatment. It is considered a failure to report income on a return.

READ MORE: Tax Expert – Picking The Best Method For Reporting Your Cryptocurrency Gains

How we help you experience the best crypto tax lessons.

I have helped taxpayers defer over $40 million in gains using like-kind exchange. We’ve done significant legal research and considered over 1400 court cases on like-kind exchange. The legal position is strong. Every traders’ situation is different. Schedule a consultation at donnellytaxlaw.com to discuss if like-kind exchange would be right for you.

Make an appointment today with Clinton Donnelly, LLM, EA.

Follow Me @CryptoTaxFixer

Please note that as of June 24, 2020 both of the images for this post have been updated if you downloaded them previously.

crypto tax lessons

Infographic source.

Video Interview & Transcription: Virtual Currency Owners Have to Confess to the IRS with Charlie Shrem

We delve into the major new tax requirement that affects virtual currency owners. Learn more from part 1 of this interview video with Charlie Shrem.

Crypto Tax Expert, Clinton Donnelly, and Crypto Influencer, Charlie Shrem discuss crypto taxes, the IRS, and why every virtual currency owner has to confess “Yes” or “No” to the IRS.  

In crypto, there are big fish, and there are small fish, find out the difference between the two.

Interview Video with Charlie Shrem (Transcribed): Part 1, Virtual Currency Owners Have to Confess to the IRS

telecommuting

Become a member of CryptoTaxAudit today to protect you from an IRS audit letter. 

In part 1 of our multi-transcription series with Charlie Shrem, Clinton and Charlie discuss why starting in 2020, every owner of virtual currency has to confess “Yes or No” under oath.

[Charlie Shrem] What’s going on starting in 2020 is that every taxpayer has to confess under oath yes or no if they’ve dealt with cryptocurrencies in the past year? 

We have a lot of useful nuggets of information. Honestly, after doing this show, I feel a lot better, and you should, too, when you listen to this show. 

A great return defends you, and a good crypto tax return is one that is not easy to prepare but a guy like Clinton Donnelly can.  When you finish this show you’ll learn how to do it on your own or you’ll be confident enough to give him a call.

He’s got a very, very good attitude about taxes, he wants to work with you, and he wants everyone to do it the right way. But at the same time realizing that you shouldn’t pay the IRS one more cent than you legally are obligated to.

If you’re buying, selling, or holding crypto, you are low-hanging fruit for the IRS. For many years I’ve been waiting for a good solution where I can be proactive in my taxes but more importantly to sleep at night.

Before the IRS picks you for an examination, subscribe to our newest sponsor CryptoTaxAudit

CryptoTaxAudit is an audit protection service designed for the needs of the crypto trader. That’s you, me, and everyone else.

If the IRS examines your crypto reporting on your tax return, the experts at CryptoTaxAudit will provide all the IRS representation and tax law research at no charge.

The statute of limitations on a crypto tax return is six years. 

CryptoTaxAudit covers you regardless of what year the IRS examines. Best of all, you can sleep well, knowing that the best crypto tax gurus are ready to defend you.

CryptoTaxAudit is a service of Donnelly Tax Law. 

While other services are reactive, CryptoTaxAudit is proactive and gives you tools like their crypto tax health check so you can reduce your chances of getting an IRS letter in the first place. 

No one likes that certified letter from the IRS. Donnelly Tax Law specializes in complex crypto tax return preparation. No situation is too complex for them. So check them out at cryptotaxaudit.com and listen, guys, start defending yourself today.

This is the most important episode you’re going to listen to on this show. 

Tax season is coming up.

And why that’s important is because:

"If you're in crypto, if you buy, sell, trade hold, do anything Bitcoin or crypto-related, this episode is extremely important."

- Charlie Shrem, Untold Stories Tweet

We’re going to talk about all the subjects and conversations you’ve been purposely ignoring.

Or that you’ve been dreading with anxiety.

Now, our guest today, Clinton Donnelly.

The New Tax Requirements for Virtual Currency

cryptos reported on anti-money laundering forms

"Clinton, thank you so much for coming on the show. You are the best crypto tax return preparer in the business. You have the cojones to do what every other CPA doesn't. The CPAs that I've talked to have turned me down."

- Charlie Shrem, Untold Stories Tweet

Thank you for coming on the show, and thank you for doing what you’re doing.

[Clinton Donnelly] I am so glad to be here, Charlie.

"I'm passionate about helping people because there's just such a lack of understanding on how to do a great crypto tax return, and it makes every crypto trader vulnerable. So I'm glad we can be talking and letting people know."

[Charlie Shrem] There’s a lot of ambiguity; there’s a lot of mystery, complication when it comes to taxes not related to crypto. So we have a lot to cover, let’s get right into it. 

The first thing on everyone’s mind that they’re thinking about right now is starting in April 2020, as of April 15th, when they have to report taxes. You have to say “Yes or No,” and it’s under oath. 

And that’s such a small question. Yet, my mother-in-law may have to say “yes” because I’ve opened up a wallet for her and given her $100 worth of Bitcoin, right? 

And now she’s going to be added to a list of all crypto holders in the country? How is that legal? How is that constitutionally legal?

[Clinton Donnelly] Well, yes, the IRS has put a question into schedule one, which is a part of Form 1040, where you list your income. 

It’s a question that’s at the top; you can’t miss it. It says, “Did you receive, sell, send, exchange or otherwise acquire any financial interest in virtual currencies during the year?” 

Virtual currencies are their word for cryptos. And this is a sweeping thing, and it’s yes or no.

[Charlie Shrem] Airline miles too.

[Clinton Donnelly] Yeah, that’s true. So there are two things you can do here. 

I think it’s a violation of our first amendment, fifth amendment, and eighth amendment rights, and I’ve written a letter. I sent it to the IRS protesting this, but hey, it’s not going to take the question off.

Once you’ve checked yes, you go on a list of the people who are crypto traders, and guess what? If you were a crypto trader in 2019, the odds are pretty high you were a trader in 2018 and 2017. So now you’ve put yourself on the list that they can go back and look at how you reported in 2017.

Did you report crypto gains? 

Did you report anti-money laundering forms in 2018 and 2017? 

This is about their compliance at the IRS now, and it is getting very sophisticated. 

It’s all data mining driven, artificial intelligence, and it’s just so easy to shake down who the big traders are and go after them. 

People think the IRS is going to go after them by calculating all these capital gains and their transactions. No, no, they take a whole different approach at coming after people, and it’s so crucial for people to protect themselves.

READ MORE: How are Cryptos Reported on Anti-Money Laundering Forms?

In crypto, there are big fish and there are small fish, so let's separate the two.

IRS assessments

[Charlie Shrem] Maybe you want to talk about that first, and then we can hear about what they do?

[Clinton Donnelly] That’s true. Everybody should consider if in the IRS’ eyes you are a small, medium, or large fish? 

A small fish would be if the most you ever had in the markets were say, no more than like $20,000 -$30,000. 

You’re small, and those people are hyper conscientious, and they want to do the right thing. But fixing your tax return is so minor, it’s going to generate such little income to the IRS, that they’re not going to go after you.

"We have a service for small fish called cryptotaxaudit.com. You can get the protection that someone's going to defend you if you ever get that letter from the IRS about how you reported cryptos."

What’s a Big Fish When It Comes to Virtual Currency?

enrolled agent crypto

But if you’re a large fish, you have much more exposure.

"The IRS wants to go after big fish because the rewards are much bigger."

"You're a big fish if you had $100,000 or more at peak at any time in the market and mainly if you are trading on foreign exchanges, which most people did."

It’s easy for the IRS to identify you and come after you. 

They sent out letters to large fish in August of this past year, basically a letter saying, did you report your cryptos? 

They called it an educational letter. I have maybe 15 clients who received these letters, and it’s amazing they all have million-dollar or more holdings.

The IRS knew who the big fish were. A lot of these people, along with one of my clients, did all their trading overseas, so the IRS knew they were big fish overseas.

"I wrote a book about this, Why Crypto Traders Are Low-Hanging Fruit For The IRS, and it gets into a lot of details. But if you're a large fish, it's vital when checking this new question that you have a bulletproof tax return."

You need to be rock solid because the IRS has a long time to come after you. 

Your statute of limitations, if you filed it correctly, is six years. But likely, 95% of people haven’t filed it correctly, and therefore, their statute of limitations is now open forever. 

Protect yourself from the IRS with a CryptoTaxAudit membership.

READ MORE: Introducing Crypto Tax Tools by CryptoTaxAudit

Watch the Video for the Full Interview

Part 2 of this transcription series is coming soon.
Subscribe to be notified. 

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Coronavirus Relief – CARES Act Approved for Individual and Business Help

In efforts to provide Coronavirus relief, Congress has come to an agreement on the CARES act stimulus bill. Learn the latest about what that means for you.

In efforts to provide Coronavirus relief, the Senate has passed a stimulus bill from Congress that is known as the CARES Act. The White House indicated it is acceptable to the president as well. The exact details are not clear yet, but the major provisions have been revealed.

The New York Times reports that there are five key provisions, noted below, although there still may be some uncertainty about the exact numbers.

Direct Payments to Taxpayers for Coronavirus Relief

Coronavirus relief

The NYT reports $1,200 in direct payments to each taxpayer, with phaseouts for those earning between from $75,000 to $99,000, plus an additional $500 per child. The Wall Street Journal has the same numbers, without specifying the phaseouts.(Those with little or know tax liability might receive only $600.)

For the purpose of calculating the amount, the government will use 2019 returns, if they’ve been already filed. Otherwise they will use 2018 returns.The money will be directly deposited into taxpayers’ accounts, if the IRS has account information. Otherwise, it will mail paper checks. This could happen in the next few weeks.

Unemployment Benefits Increased and Radically Changed

The NYT says the bill extends jobless insurance by 13 weeks and includes a four-month enhancement of benefits. Insiders, according to the NYT and WSJ, say that gig workers such as freelancers and Uber drivers will also be covered, a major change in how unemployment insurance works.

According to the New York Times, eligible workers will get an extra $600 per week on top of their state benefit.

READ MORE: Coronavirus Relief Package Signed Into Law – More to Come

Coronavirus Relief Gives Small Businesses Aid With Conditions

A major sticking point in the negotiations was whether aid should go to businesses or to individuals. A novel provisions does both: The government will guarantee loans to small businesses and forgive those loans if the companies keep their employees. This gives these businesses a strong financial incentive to avoid layoffs.

Federal Reserve Loans — With Heavy Oversight

Coronavirus relief

This was another controversial provision — billions of dollars in a fund controlled by the Federal Reserve. Opponents characterized this as a slush fund that benefits companies at the expense of their workers.

However, additional conditions helped ensure its passage; the government will immediately reveal any recipients, and an inspector general and a congressionally appointed board will monitor it, according to the NYT. The WSJ noted companies receiving these loans cannot do stock buybacks now or in the near future. The total amount of the loan fund is estimated to be about $500 billion.

READ MORE: Tax Filing Deadline Extended to July 15 Due to COVID-19

Coronavirus Relief Health Assistance

The bill includes upward of $100 billion in aid to hospitals.

Again, none of these numbers are final, and the bill has not yet been signed, although there is wide agreement it will go through as is. We’ll have more updates as they become available, including information on the mechanism for distributing the aid checks.

© 2020

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US Expat Tax: What You Need to Know as an American Living Abroad

US expat tax doesn’t have to be confusing. Feel secure as an American living abroad with these exclusive excerpts from my book “Expat Tax Overview”.

Here I share exclusive excerpts of my book, Expat Tax Overview, to show you how to handle US expat tax, the problems that can arise, and how to get good tax advice when you need it.

There is a lot of confusion for American expats when it comes to reporting US taxes while living abroad.  

Most Americans living abroad aren’t aware that they must file US tax returns on their worldwide income and that they must report their foreign financial accounts and assets.

And it’s not their fault because even most domestic tax preparers are unaware of the requirements for US expat tax. 

So, where should Americans living abroad turn when filing their tax returns? We at Donnelly Tax Law are here to help.

I wrote the book Expat Tax Overview to help Americans living abroad understand how they are taxed, to understand US expat tax preparation risks, and to explain how to benefit from credits and exclusions. It comes from the years of experience I have filing complex tax returns for Americans living abroad.  

The following extractions came from the book “Expat Tax Overview”, by Clinton Donnelly of Donnelly Tax Law. It’s the handy overview that every American living abroad should have to understand how they are taxed.

Do I have to file my US tax return while living abroad?

backup withholding

Yes, The US is unique in this way from other countries.  

All US citizens and permanent residents are subject to taxation on their worldwide income regardless of where they live in the world, and even though they may be filing another tax return in a foreign country. 

It’s possible to have a foreign country tax your worldwide income if you are a resident or present for six months or more.  

However, tax havens do exist with special incentives.  

But each foreign country or US territory does it differently.

Puerto Rico is technically a territory of the US, but it has unique tax incentives that have been luring back American expats and crypto traders.

READ MORE: Why Crypto Traders Should Move to Puerto Rico by 2020

How can an American abroad survive paying US expat tax?

retirement

Congress implemented a couple of substantial tax breaks to offset the obligation of filing taxes when living abroad. 

The first one is the Foreign Tax Credit (FTC). 

The second one is the foreign earned income exclusion (FEIE). 

What is the Foreign Tax Credit?

The foreign tax credit provides a dollar for dollar credit on your US taxes for income taxes paid in a foreign country. 

What is the Foreign Earned Income Exclusion?

One of the most significant tax breaks in the tax code is the foreign earned income exclusion. 

For 2020, the first $107,2002 of earned income overseas can be excluded from income taxes. 

This exclusion can be used in any foreign country, whether or not you pay income taxes in that country. 

There are a lot of rules regarding qualifying for this exclusion, so they must be followed closely. 

I have written a 320-page book, Foreign Earned Income Exclusion, specifically on this exclusion.

If you think you might be eligible for the Foreign Earned Income Exclusion, you will find this book to be a real asset for you.

Your US Expat Tax Won’t File Itself

tax planning

It would be best if you were proactive in making sure your tax returns get done correctly with all the foreign elements reported. 

You cannot wait until the last minute to find a tax preparer. 

It is better to find a trustworthy and experienced tax preparer who can provide you with advice as you make financial decisions and help you document your tax return at the end of the year. 

Is your domestic tax preparer or CPA experienced with foreign information returns?

According to the IRS, less than 1% of all individual tax returns are international. 

Thus, domestic tax preparers and CPAs are unfamiliar with the filing requirements and penalty risks.

Does Consumer Tax Software Support US Expat Tax?

anti-money laundering

Because the US expat tax marketplace is so small, no commercial tax software adequately supports the requirements of Americans living abroad. 

We know that US expat tax filing requirements and the difficulty of finding qualified preparers may be overwhelming. 

But don’t panic. 

All you need is a plan and a qualified tax preparer to be on your team.

To get more information about US expat tax returns and the Foreign Earned Income Exclusion purchase my books below.

You can also schedule a consultation with me to discuss your particular situation and get a quote for services.

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How are Cryptos Reported on Anti-Money Laundering Forms?

Here I share exclusive excerpts of my book, ‘Basics of Crypto Taxes’ to show you how cryptos are reported on anti-money laundering forms.

I’ve been getting so many questions lately related to the reporting of cryptos on  anti-money laundering forms. There’s a lot out there about the anti-money laundering forms, but when it comes to reporting your cryptos on them… Well, that’s new territory for most traders and tax professionals.

I wrote the book Basics of Crypto Taxes, to address this exact topic. It comes from the years of experience I have in filing anti-money laundering forms and crypto taxes. Here’s a sneak peek into it so that you can better understand how cryptos are reported on anti-money laundering forms.

The following was extracted from the book “Basics of Crypto Taxes” by Clinton Donnelly. Some additional comments have been added.

What are the two anti-money laundering forms required of individuals?

International financial regulations require each country to take significant steps to prevent the laundering of the proceeds of crime and terrorism funding also called money laundering. A large part of the US anti-money laundering (AML) enforcement is the requiring of forms to be filed related to foreign transactions. These forms are used after-the-fact to scare people who have misreported or not reported when they should have.

For the individual, two forms must be filed to comply with AML regulations. The first form is called the Report of Foreign Bank Accounts and Financial Accounts. The second form is the Statement of Specified Foreign Assets.

What is the FBAR form?

crypto audit defense

The FBAR form is the short name for the Report of Foreign Bank Accounts and Financial Accounts. This form is also called FinCEN Form 114.

The FBAR form has been a requirement for individuals to complete since 2004. On this form, the taxpayer lists the maximum balances of his foreign financial accounts during the year. Foreign crypto exchanges are considered foreign financial accounts by FinCEN.

Does everyone have to file an FBAR form?

No. Filing this form is not required if the sum of the maximum balances of all foreign financial accounts added together is less than $10,000. If the sum of all balances is more than $10,000, then all foreign financial accounts regardless of the balance must be reported. Many people mistakenly think that they have to report only specific accounts with a balance of over $10,000. This is wrong. It is the sum that is compared to $10,000.

If you are required to filed an FBAR, then you must report all foreign accounts regardless of the account balance. This means if you had a foreign exchange account that you never formally closed, then you must report that account even if the maximum balance all year was zero.

What is the penalty for not filing the FBAR form on time?

If the IRS decides that you should have filed an FBAR when you hadn’t, then there is an immediate $10,000 assessed the moment the IRS issues you the notification letter. This penalty increase to $50,000 if you don’t file an FBAR within six months.

Once you give an FBAR to the IRS after receiving the notification letter, an additional penalty is assessed. This penalty depends on whether the IRS decides that you were willful in your negligence or not.

The non-willful penalty for not filing this form is $10,000 per account that should have been reported. For example, if you traded on five foreign exchanges and the sum of your maximum balances on these exchanges was $150,000, and you’d never filed the FBAR form, the penalty that could be assessed would be $50,000 or $10,000 times the number of accounts not reported.

The willful penalty is 50% of the account balance of each account. This penalty used to have a maximum of $100,000, but this limit has been removed.

Are you serious? A $10,000 penalty?

tax trouble

Dead serious. Congress has chosen to use a harsh penalty to motivate honest people to be diligent to complete this form. Several times this penalty has been challenged in the courts as a violation of the eighth amendment protection against “excessive fines imposed.” The Supreme Court has sided with the government because of the AML argument. The presumption is that the funds in the account are only the tip of the iceberg of the amount of dirty money that was being laundered.

When is the FBAR form due?

This form is filed at the same time as your individual income tax return or April 15. If you file for an extension on filing your income tax return, you automatically get an extension on your FBAR filing.

Filing the FBAR form after the deadline is an automatic $10,000 penalty. This is Congress’s way of getting your attention to comply with the regulations. Criminals and money launderers, of course, do not want to file these forms because it is incriminating to them. So, don’t behave like a criminal. File your FBAR on time.

How to file the FBAR form?

If you use a professional tax preparer, their tax software might enable them to file your FBAR form for you. However, self-filers are not as fortunate. TaxACT, TurboTax and all the other tax software packages have chosen to not offer electronic filing of the FBAR form for you. (There must be a fear of legal liability.)

As a result, the self-filer must use the government website to file his FBAR. It is easy to do. I recommend preparing an FBAR form 114 using the PDF form method rather than the online method. The form is uploaded onto this website https://bsaefiling1.fincen.treas.gov. By using the PDF version, you can re-use the PDF form in subsequent years by just updating the maximum balances. Considering it is a government website, it is reasonably easy to use.

Should you file an FBAR form if the due date has passed?

paying taxes

Yes, however, you need to claim tax amnesty on any late-filed FBAR form. Failure to do so will result in an automatic $10,000 penalty (footnote 1). To request this amnesty, when filing the FBAR there is an opportunity to select an explanation code for late filing. I recommend selecting option ”Z” other. A box will open to allow entering a custom explanation like, “I did not know I had to file. This form is submitted under the Delinquent FBAR procedure”.

What is Form 8938 - the other anti-money laundering form?

In 2010, Congress passed a sweeping law called the Foreign Account Tax Compliance Act (FATCA) which significantly increased the reporting requirements of Americans with foreign financial accounts including crypto exchanges. This law obliges taxpayers to report their foreign financial accounts and financial assets each year with their tax return. To be clear, this is an IRS form that is considered part of your tax return.

In addition to reporting your foreign accounts similar to the FBAR form, you must report all “all financial transactions and contracts for investment purposes where the counterparty is other than US person” (footnote 2). By this definition, the sum of all purchases and sales of all crypto assets during a tax year must be reported. Since the other party of an exchange is anonymous, you must assume they are not a US person, even using a US exchange. Depending upon the volume of trades you make, this number could be orders of magnitude higher than the value of your assets. This calculation of all purchases and sales would include even those on US exchanges (footnote 3).

The FATCA law and Form 8938 were written with very broad terms such that assets may be counted multiple times. The penalties for underreporting are so high, $10,000, that there is no incentive to underreport or under-characterize these foreign assets (footnote 4). Basically, the bigger a number you report, the safer you are.

Are there penalties for not reporting or reporting after the due date?

Yes. The penalty for not filing Form 8938 with your tax return is $10,000.

Consequently, if you need to fix past tax returns because you didn’t include an accurate Form 8938, you must do it under a tax amnesty program (footnote 5).

How to file Form 8938?

tax planning

Form 8938 is filed with your 1040 tax return. If you e-file your tax return, then the 8938 gets e-filed with it.

See My Book: 10 Steps to a Great Crypto Tax Return

Does everyone have to file a Form 8938?

My answer is Yes and No.

Yes. Form 8938 is one of those rare times where it is safer to over-report than under-report. The bigger the amount reported, the safer you are. Some people get fixated about not filing if under the threshold. I believe not filing actually draws more attention to you by the IRS data mining computers, than if you file.

No. Form 8938 is not required if the sum of the balances of your foreign accounts plus the sum of the buy and sell transactions is under $50,000 if single or $100,000 if married (footnote 6). Minimum filing thresholds are increased if you live overseas (footnote 7). Because of the broad description of foreign assets under the FATCA law, it is easy for a trader with no more than $10,000 invested in the crypto marketplace to exceed the minimum filing thresholds by doing frequent trades. There is nothing to gain by not reporting.

That being said, I recommend that all crypto traders file both forms regardless of the minimum filing thresholds. Why? The IRS is using data mining computers to catch crypto traders not reporting correctly. Data mining looks for logical relationships and flags taxpayers when the relationships are missing. So given that they know you traded on foreign exchanges, you should have filed an FBAR and a Form 8938. They can’t tell if you are excepted by being under the filing threshold. By filing, you satisfy the logical condition and avoid putting yourself on the list of taxpayers to be examined.

Footnotes:

1) For FBAR self-filers, see our Crypto Tax Fixer Package, which includes my book Tax Amnesty Made Easy (not sold separately).

2) 26 USC 6038D(c)(2)(B)

3) Even if you do crypto to crypto trades on the US exchange like Coinbase Pro, the other party to your trade is not the exchange, but the other person they have found to take your trade. Since you can not assume that an anonymous person is an American, you must assume that the other persons to all your exchanges are foreigners.

4) GAO ‘Foreign Asset Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad’ <2019> GAO-19-180 https://www.gao.gov/products/GAO-19-180, p17.

5) When you file for tax amnesty, you have one chance to do it right. I recommend using a professional to prepare your amnesty paperwork. The stakes are very high not to consider this. Still, if that is not an option, tax amnesty self-filers can use our do-it-yourself Crypto Tax Fixer Package, which includes my book Tax Amnesty Made Easy (not sold separately).

6) There are actually several tests for determining the minimum filing threshold on Form 8938, which makes it confusing to determine. The numbers listed here are the most conservative threshold levels.

7) See the instructions for Form 8938 about a complete description of the minimum threshold amounts.

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