Category: Filing Requirements

Form 3520: Foreign Gift of Cryptocurrency and Other Assets

Posted on by sommers
Global Crytocurrency image

Introduction:

Say you receive a gift or inheritance1 from a foreign individual of cryptocurrency, or other assets, including cash: First, the good news – the gift is not taxable to either the foreign donor (giver) or the done (recipient) – you receive the gift tax free. The bad news, check out these potential filing and disclosure requirements (including Form 3520)!

Example: Assume you are a single U.S. taxpayer (note, your citizenship or visa status is irrelevant– these rules apply to every U.S. taxpayer).2 In calendar year 2020 your foreign parent makes you three gifts on different dates, of: (i) $50,000 in cash; (ii) stock in a foreign company worth $75,000; and (iii) cryptocurrency worth $100,000, for a total of $225,000.3 Assume the cash was deposited into a foreign bank account owned jointly by you and your parent. What were your U.S. tax obligations?

Tax Reporting Obligations:

Form 3520: This form is required whenever you receive one or more gifts from one or more foreign individuals during the calendar year when the aggregate fair market value exceed $100,000. [See my Form 3520 video for more details] In our example, you received foreign gifts worth $225,000 reportable on or before the due date of your 2020 income tax return, either April 15, 2021 or October 15. 2021. Since you did not timely file Form 3520, you could be subject to huge penalties, 5% per each month the return is late, to a maximum of 25%. Form 3520 is a separate and independent filing obligation and must be paper-filed with the IRS in Odgen, Utah. The statute of limitations for IRS to assess this penalty is suspended until three years after the return is filed.

FBAR: Because there was more than $10,000 in your jointly-held foreign bank account in 2020, you were obligated to file an FBAR (Report of Foreign Bank and Financial Account) by the due date of your income tax return, with regard to extensions, similar to the deadline for filing Form 3520. The FBAR is filed on-line and is a separate and independent filing obligation. The FBAR also applies to stock held in a bank or brokerage account (or similar institution). There is a six-year statute of limitations for FBAR penalty assessments.4

Form 8938: Your foreign financial assets exceed the $50,000 threshold for single filers ($100,000 for joint filers residing in the U.S.); therefore, you needed to file Form 8938 with your income tax return. Your foreign bank account and stock holdings are foreign financial assets and your cryptocurrency might be a foreign asset if it is held by a foreign exchange or foreign $100,000, whichever is higher, if IRS concludes you willfully failed to file the FBAR. Penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty. financial institution. The penalty for failing to file Form 8938 is $10,000 per year and there is no statute of limitations for assessment of the penalty until three years after the form is filed.5

Form 1040: On the first page of Form 1040, IRS asks, “At any time during 2020, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? Yes or No.” You must answer this question “Yes” because you received a gift of cryptocurrency. Note receipt of cryptocurrency (other than by purchase), whether from a U.S. or foreign person and whether by exchange, gift or inheritance requires a “Yes” answer. Although there is not a specific penalty for failing to accurately answer this question, it is clearly a badge of fraud if you supply a false or misleading answer and remember, you file tax returns under federal laws of perjury. In short, there are criminal tax fraud implications if you deliberately falsify your answer to this question. Failing to answer the question in circumstances where you were required to answer “Yes” amounts to fraud, so don’t be clever and not answer the question.

Other issues: If your ownership interest in the foreign corporation is 10% or more, you could have a Form 5471 filing obligation. There is a similar, although not identical rule for foreign pass-through entities, such as partnerships or limited liability companies. If the foreign stock was held in a foreign mutual fund or other passive investment, you could have a PFIC (Passive Foreign Investment Corporation) Form 8621 tax issue. The PFIC rules can be extremely complex and only a handful of CPAs are qualified to handle them. Also, PFICs may have potentially punishing tax rates.

Conclusion:

What appeared to be a simple foreign gift/inheritance transaction with no immediate tax consequences may generate a multitude of reporting duties. A foreign gift/inheritance of —

a. Cryptocurrency could trigger Form 3520, Form 8938 and FBAR filing requirements, as well as a Form 1040 virtual currency disclosure.

b. Cash or assets could trigger Form 3520, Form 8938 and FBAR reporting obligations.

c. Foreign stock or securities could spark Form 3520, Form 8938, FBAR (if the stock is held in a foreign financial account). Form 5472 and PFIC filing duties.

  1. Note: The rules apply with equal force to foreign inheritances.
  2. Note: Those who are physically present in the U.S. illegally still must comply with U.S. tax law and these rules apply to illegal assets or substances as well. In general, the tax code makes no distinction between legal or illegal activities or assets.
  3. Note: non-cash gifts are priced at fair market value at the time of the gift.
  4. The penalties range from $10,000 for a non-willful failure to as much as 50% of the amount in the account or $100,000, whichever is higher, if IRS concludes you willfully failed to file the FBAR. Penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty.
  5. As with other international form filing penalties, Form 8938 penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty.

FBARS: Is Your On-Line Gambling Or Virtual Currency Account Reportable?

Posted on by sommers

With certain limited exceptions, U.S. taxpayers with one or more foreign bank and investment accounts containing at least $10,000 (in cash or assets) in the aggregate during the calendar year must file an FBAR (Report of foreign bank and financial accounts), FINCIN Form 1141. This obligation is separate from your obligation to file income tax return. See Appendix “A” for a detailed explanation regarding FBAR filings. 

What is a foreign financial account for FBAR purposes? 

If you have an on-line gambling account hosted in a foreign country in which you deposit funds to gamble, is it a foreign bank account? A federal district court said yes, but it was overruled by the Ninth Circuit Court of Appeals in U.S. v Hom (decided in 2016), in which the court held that merely having a foreign account that primarily facilitated online gambling, without additional characterizes of a financial account or bank – such as the transfer of funds from one financial institution to another, or providing interest-bearing accounts or lending services – was not a bank for FBAR purposes. Unfortunately, the Hom case was designated as “unpublished” and cannot be used for legal precedent; although, it appears that FinCEN has backed off challenging on-line gambling accounts for the time-being. 

What about a foreign virtual currency account? 

The same reasoning under Hom should apply to these accounts. But there is good news and bad news concerning virtual currency accounts: Currently, FinCEN’s position is they are not reportable on an FBAR; the bad news – FinCEN is drafting regulations to make them FBAR reportable. Expect the regulations to be finalized in 2021 or 2022. 

 Conclusion: 

If you currently have unreported on-line foreign gambling or virtual currency accounts that lack any traditional banking attributes, you probably do not have a FBAR filing requirement. For virtual currency accounts, this will change once Fin CIN publishes regulations requiring FBAR reporting in the near future. 

 1 FinCEN means Financial Crimes Enforcement Center and is part of the U.S. Treasury. 

Appendix “A” 

Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, corporate, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to file an annual Foreign Bank and Financial Account Reports (FBARS) on-line with FinCEN. Starting with the 2016 FBAR, the due date is the due date of the 2016 income tax return, with regard to extensions. Both current and delinquent FBARs must be filed on-line: FBAR On-line. 

To determine the value of a foreign account during the year, the highest value of the account during the year is multiplied by the U.S. dollar exchange rate at the end of the year, using the U.S. Treasury Exchange Rates. If the rate is not available, then use any recognized exchange rate service. 

The maximum fine for a non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessment of the penalty (thus, there can be $60,000 in penalties, one for each delinquency). The penalty may be reduced or eliminated upon a showing of “reasonable cause,” which mean, basically, that taxpayers were not negligent in their failure to comply. There is an amnesty program if taxpayers reported their foreign financial account income and gains, but failed to file FBARS. 

For willful violations, the penalty can be as high as 50% of the highest amount in the accounts during the past six years or $129,210 (increased for inflation), whichever is greater, and IRS has a string of recent federal court victories upholding the imposition of willfulness penalties. Willfulness includes objectively reckless behavior in additional to intentional conduct. In a recent case, Horowitz, No. 19-1280 (4th Cir. 10/20/20), the court of appeals upheld a willfulness penalty where taxpayers failed to disclose to their accountants the existence of foreign accounts and checked the box “no” on Schedule B, Part III (that asks whether you have foreign accounts).