FBAR for Crypto: Avoid These 6 Common Filing Blunders

Tax Accounting

FBAR for Crypto: Avoid These 6 Common Filing Blunders
From understanding signature authority to keeping meticulous records, learn how to navigate the complexities of FBAR when dealing with crypto.
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Let's talk about crypto, FBAR, and you. Yes, you, sitting there with your digital wallet brimming with Bitcoin, Ethereum, or the latest meme coin. You might be thinking, “I've got to file an FBAR for this, right?” Well, not so fast.

The first mistake is thinking you have to file if your crypto isn't held in a foreign account or if the aggregate value of those foreign accounts doesn't exceed $10,000 at any time during the calendar year. If you're not in that boat, you can breathe easy. As of 2023, the guidance in FinCEN’s Notice 2020-2 still stands:

“[A]t this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency).”

But if you do meet that parenthetical requirement, oh boy, we've got a list of blunders you'll want to avoid. From not filing at all (a classic mistake) to not understanding what “signature authority” means (it's not as complicated as it sounds), we're going to look at the six common FBAR filing mistakes if you own crypto in a foreign account and how to sidestep them.

Mistake #1: Not filing at all

The most common mistake people make when it comes to FBAR filing is simply not filing it. If you assessed your situation using the flowchart above and it turns out you need to file an FBAR, you’re already ahead of the game simply by knowing you need to file.

Now set yourself a reminder to fill out the forms (a good crypto tax tracking software like Bitwave can help here) or hire a tax advisor to do it for you. The consequences of not filing an FBAR when required can be severe, including substantial financial penalties and potential criminal charges.

Mistake #2: Not reporting all accounts

If you have multiple foreign accounts that hold both cryptocurrency and other reportable assets (like fiat currency), each of these accounts needs to be reported on the FBAR if the aggregate value of all the accounts exceeds the $10,000 threshold at any point during the year.

Some people make the mistake of only reporting their primary account or the account with the highest balance. However, the requirement is to report all qualifying foreign accounts, regardless of how many there are or how they are used.

Failing to report all qualifying accounts can lead to penalties. The penalties for non-willful violations can be up to $10,000 per violation, and the penalties for willful violations can be much higher.

Mistake #3: Filing late

The FBAR is due the same day you file the rest of your taxes, typically April 15th, unless that falls on a public holiday.

However, if you miss the April 15th deadline, don't panic. The IRS provides an automatic extension to October 15th for those who fail to meet the initial deadline. This extension is automatic and does not require a specific request.

Filing after the extended deadline of October 15th can result in penalties. The penalties for non-willful violations can be up to $10,000 per violation. For willful violations, the penalties can be much higher, including a fine of up to $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater.

It's important to note that the FBAR is not filed with your federal tax return, and its deadline may not align with your tax return deadline if you've requested an extension for filing your tax return.

Mistake #4: Not reporting the maximum account value

When filing an FBAR, you're required to report the maximum value of each foreign account during the calendar year. This is not the balance at the end of the year, nor is it the average balance over the year. It's the highest amount that was in the account at any point during the year.

In the context of crypto, if you have a foreign account that holds both fiat and crypto, you would need to report the maximum value of the entire account, including both the fiat and the crypto, if the aggregate value exceeds $10,000 at any point during the year.

Mistake #5: Not understanding signature authority

Some people make the mistake of thinking they only need to report accounts they own. However, the requirement is to report accounts over which you have signature authority, too, meaning you may need to file an FBAR even for accounts you don't own.

What is signature authority? In simple terms, if you have the ability to access and manage a foreign financial account, even if you don't own the assets in the account, you may still need to report the account on an FBAR. This is common for people who manage accounts for businesses, trusts, or on behalf of others.

Mistake #6: Not keeping records

When you file an FBAR, you must keep records for each account you report for five years from the filing date. The records must include:

  • The name on each account
  • The number or other designation of the account
  • The name and address of the foreign bank or other person with whom the account is maintained
  • The type of account
  • The maximum value of each account during the reporting period

So if you have a reportable foreign account, you would need to keep records for that account, including information about the crypto holdings.

Some people make the mistake of not keeping adequate records or not keeping them for long enough. However, you could face penalties if the IRS or FinCEN requests these records and you cannot provide them.

Simplify your crypto accounting and tax reporting with Bitwave

Navigating the complexities of FBAR filing, especially when it involves crypto, can be a daunting task. This is where crypto tax tracking software like Bitwave comes into play.

With Bitwave, not only can you easily keep track of the maximum value of each account during the reporting period, which is a critical piece of information for FBAR filing, but Bitwave can also help you track your crypto transactions, calculate your gains and losses, and provide the necessary data for tax reporting.

Experience firsthand how Bitwave can streamline your FBAR filing process and make managing your cryptocurrency holdings easier. Request a demo today!

Cover image by Shubham Dhage on Unsplash

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Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.