This blog post is based on a presumption and projection of a proposed rule that may be modified delayed or cancelled. In other words this is a warning of ‘worst case’ impact on us based on the latest available information,
Until now an owner of virtual currency had no obligation to disclose those holdings to the government other than to report income. On December 30, 2020 the U.S. Treasury Department made a significant announcement in FinCEN Notice 2020-2 that virtual currency will be reported on the annual Financial Accounts and Financial Reports (FBAR), the same as a foreign bank account. No other details are provided. We presume but do not know that the change applies for 2021.
I also presume that most people, including those who own virtual currency, are unfamiliar with the FBAR. But those who hold foreign accounts are aware of the burden and significant risks posed by this annual government reporting requirement. The FBAR is not part of your tax return but is usually filed at the same time. It is longer and more complicated that a typical income tax return.
The burden of this reporting requirement should not be underestimated. The penalties of failures to file and errors in reporting are substantial: more than typical income tax penalties. The amount of time required to prepare the report is more than the time required to prepare a typical income tax return.
At this point we know almost nothing. An announcement of a proposed regulation is not particularly useful in terms of financial planning. Let’s stay timed for more.