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Promotional graphic for a guide on Form 8938, focusing on cryptocurrency reporting for tax compliance. The visual features a central, large Bitcoin symbol imposed on a circuit board background, flanked by smaller cryptocurrency coins like Ethereum, calculators, cash, and snippets of tax forms. The top left corner includes the logo of 'CryptoTaxAudit', with a tagline 'The Crypto Tax & IRS Audit Experts'. The headline 'Form 8938: A Guide to Cryptocurrency Reporting for Tax Compliance' is prominent in the upper half. Below, there's a subtitle 'Guide to Form 8938 for crypto tax compliance, highlighting penalties for non-filing and the importance of reporting foreign-held crypto assets.' The overall design merges elements of finance and technology to convey the topic of crypto tax reporting.

crypto tax guide Jan 28, 2024

Listen up! 

Medium to large-scale crypto investors must know their legal obligation to file Form 8938 with the IRS.

 
Key Point: Failure to file Form 8938 when required is very risky for crypto traders. Why?

  •  If the IRS realizes the omission and notifies you by letter, there is an automatic $10,000 penalty, growing to $50,000 if you don’t supply the form within 6 months.
  •  If Form 8938 is required but not filed, the statute of limitations won't start until the form is filed. This is a massive exposure.
  • The accuracy penalty if audited is increased from 20% to 40%.
  • Most CPAs, accountants, and tax preparers do not understand Form 8938.

Do we have your attention yet?


What Should I do?

Read the rest of this article. If you have a Form 8938 problem for past years, schedule a consultation with us at CryptoTaxAudit.com/contact.

We have filed over 1200 tax returns seeking tax amnesty related to unreported foreign assets. We have prepared almost 4000 tax returns with Form 8938.

By filing Form 8938 when required, you can sleep better knowing that the statute of limitations protecting you has started.


What is Form 8938?

This form is for reporting “specified foreign financial assets”. This refers to your crypto assets when you hold them on foreign financial exchanges, trade on defi platforms, or receive them from non-US persons. On this form, you report the maximum market value in USD held on each foreign exchange during the year. Also, you report the sum of all your buys, sells, swaps, and rewards during the year.

Most CPAs and tax preparers are unaware of this form because they don’t have clients with foreign-held assets or cryptocurrencies.

Form 8938 was introduced because of the Foreign Account Tax Compliance Act (FATCA) law passed by Congress in 2010. This law imposed an anti-money laundering reporting obligation on US persons with foreign assets. No tax is associated with Form 8938, but failure to file when required will cause a whole world of hurt.

While Form 8938 does not directly impose new taxes, the consequences of failing to file it when required can be substantial. Neglecting this obligation can lead to a penalty of $10,000, escalating to $50,000 if the IRS notifies the individual of their non-compliance and the situation still needs to be addressed. In addition, a 40% accuracy-related penalty on underpaid taxes linked to undisclosed foreign assets further underscores the seriousness of these requirements.

For cryptocurrency investors, the implications of Form 8938 are particularly pertinent. Cryptocurrencies, when held on foreign exchanges like Binance, are considered accounts at financial institutions as defined in section 6038D(b)(1). Additionally, transactions with non-U.S. persons involving cryptocurrencies fall under the reporting purview of Form 8938, reflecting the broad reach of the term "financial instrument."


Understanding Specified Foreign Financial Assets

The concept of "specified foreign financial assets" is crucial in Form 8938, as per § 1.6038D-3 of the FATCA regulations. Although the regulations don't explicitly mention 'crypto assets' or 'digital assets,' the definition encompasses all cryptocurrency investments.

Specified foreign financial assets, according to § 6038D(b), include financial accounts maintained by a foreign financial institution. When crypto assets are held on foreign exchanges like Binance, Bybit, or KuCoin, they fall under this category. This is due to the nature of these exchanges, as outlined in §1471(d)(5)(B) and (C). These platforms are considered financial institutions because of their role in holding financial assets for others and their involvement in the business of investing, reinvesting, or trading in various financial instruments, including cryptocurrencies. Understanding this categorization is key to correctly reporting cryptocurrency holdings on foreign exchanges.

Furthermore, the term “financial instrument” in Form 8938 serves as a catch-all phrase. It includes not just traditional financial assets but also digital currencies like Bitcoin and other cryptocurrencies. This classification is significant because it implies that all transactions in cryptocurrencies where the counterparty is not a US person must be reported under FATCA. 


Who Must Report?

The focus then shifts to who is required to file. Under § 1.6038D-1, a "specified person" includes U.S. citizens, resident aliens for any part of the tax year, and certain nonresident aliens. This broad definition means a wide array of individuals, especially those engaged in cryptocurrency transactions with international components, are covered by FATCA's reporting requirements. It’s essential for these individuals to recognize how their cryptocurrency activities align with these definitions to ensure proper compliance.


Reporting Transactions with Non-US Persons Under Form 8938

Form 8938 reporting requirements also extend to transactions involving cryptocurrencies with non-US persons, as detailed under § 6038D(b)(2)(B). This aspect of the FATCA regulations captures a broader scope of international financial interactions that U.S. taxpayers might engage in.

Under FATCA, a "non-US person" encompasses any individual or entity that is not a U.S. citizen, U.S. resident, a legal entity incorporated in the U.S., or any unincorporated association or partnership of U.S. persons. 

Just to be clear. If you received or traded with anonymous persons or protocols, then this transaction must be reported. 

This broad definition means that many global transactions could fall under the reporting requirements if they involve non-US entities or individuals.


Reporting Requirements

Form 8938's reporting requirements, as detailed in § 1.6038D-2 of the FATCA regulations, are primarily based on the aggregate value of foreign financial assets, including cryptocurrencies. It's critical for taxpayers to be aware of these thresholds to determine their reporting obligations. Generally, the taxpayer might be exempt from filing if the total value of foreign-held cryptocurrencies does not exceed $50,000. 

However, the specifics of these thresholds can be complex, particularly when it comes to digital assets like cryptocurrencies. The thresholds vary based on filing status and residency. For instance, they differ for single filers, married individuals filing jointly, and those living abroad. The values of these assets at different times of the year play a key role in determining the reporting obligation.

Given the intricacies and variations of these thresholds, we have dedicated a separate article to this topic, which provides a detailed discussion on the minimum filing requirements, how to calculate asset values and specific considerations for cryptocurrency holders. 


When is Form 8938 Due?

Form 8938 should be attached to the taxpayer’s annual 1040 tax return if they meet the specified criteria based on the value and nature of their foreign assets. If the taxpayer obtains an extension of time to file their income tax return, the form is due by the extended due date. 


Valuation and Reporting Challenges

Valuating cryptocurrency holdings for reporting on Form 8938 presents unique challenges, as outlined in § 1.6038D-5 of the FATCA regulations. Unlike traditional financial assets, the valuation of cryptocurrencies can be highly volatile, making accurate reporting more challenging than other financial assets. Due to this potential for rapid value changes, taxpayers might consider adopting a conservative estimation strategy to avoid underreporting.

According to § 1.6038D-5, the valuation of specified foreign financial assets, including cryptocurrencies, should be based on their fair market value. This means that taxpayers need to determine the highest value of their cryptocurrency holdings in U.S. dollars during the tax year. Given the volatile nature of the cryptocurrency market, where the value of cryptocurrencies can fluctuate significantly within short periods, it can be challenging to pinpoint the maximum value accurately.

When it comes to the practical aspects of reporting these holdings on Form 8938, the regulations under § 1.6038D-4 offer guidance. Financial accounts typically have specific account numbers and are held with institutions with clear physical addresses. However, cryptocurrency exchanges, especially those based overseas, may not conform to these traditional identifiers. In such cases, taxpayers are advised to use the login ID for the foreign exchange as the account number. This adaptation recognizes the unique nature of digital asset exchanges and provides a practical solution for identifying accounts on Form 8938.

Furthermore, for exchanges that do not have a traditional street address, taxpayers may enter "unknown" in the address field on the form. This accommodation is particularly relevant for online-only platforms where the physical location is neither applicable nor publicly disclosed.


Penalties for Non-Compliance

Under the regulations of the FATCA, specifically § 1.6038D-8, the penalties for failing to file Form 8938 are stringent and escalate based on the duration of non-compliance. These penalties are a significant deterrent against omitting foreign financial asset information, including cryptocurrencies.

If the IRS identifies an individual’s failure to file and notifies them, then $10,000 is immediately assessed. If the taxpayer hasn’t filed the Formo 8938 within 90 days after notification, an additional $10,000 fine is assessed. Each 30 days thereafter, another $10,000 is assessed. At this rate, after six months, the taxpayer hits the maximum penalty of $50,000.This is the seriousness with which the IRS views non-disclosing foreign assets.

In addition to these substantial fines for non-filing, the FATCA regulations also include a significant accuracy-related penalty. This penalty pertains to the underpayment of taxes attributable to undisclosed foreign financial assets. The accuracy-related penalty has been increased to 40% of the underpaid tax. This is a notable rise from the previous penalty rate of 20%.

Furthermore, it's important to note that the statute of limitations for the assessment of taxes does not begin until Form 8938 is filed. This means that the IRS can audit years for which this form was required but not filed, potentially leading to further tax liabilities and penalties.


Conclusion

Complying with the requirements of Form 8938, as specified in the FATCA regulations, is more than a legal obligation; it's a crucial part of responsible financial management, particularly for those involved in cryptocurrency transactions.

The severity of penalties for non-compliance, ranging from $10,000 for late filing to up to $50,000 following IRS notification, highlights the seriousness with which the IRS views the disclosure of foreign financial assets. Additionally, the increased accuracy-related penalty for undisclosed foreign assets signals an era of heightened scrutiny.

Taxpayers need to be exceptionally vigilant given the complexities in reporting cryptocurrencies, whether as accounts at financial institutions or transactions with non-US persons. Ensuring their filings accurately reflect their holdings and transactions is vital to avoid substantial penalties and legal issues.

Professional advice is highly recommended for those dealing with significant crypto assets or complex transactions. CryptoTaxAudit, with its expertise in cryptocurrency taxation, is well-equipped to assist clients in navigating these intricate reporting obligations. We encourage you to schedule a consultation to ensure compliance with these critical tax regulations.

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