I attended two days of IRS seminars, and what I heard was even more upsetting than their message in 2017.
In 2017 IRS stated that §1031 didn’t apply to crypto exchanges, and therefore every transaction between currencies was a taxable event (reportable). This includes using your bitcoin wallet to buy a pizza; put it on your schedule D. maddening.
This year now they are telling us that since cryptocurrency has no situs in the US, that it is reportable and subject to FATCA requirements. I asked if this was based on the origin of the currency or the location of the business that holds the ‘wallet’. They were still unsure. In short, this means we have a little time before they can enforce it if they don’t yet know wtf they are talking about. BUT we know that IRS, as an institution is dumb as a box of rocks, so don’t think that logic will prevent them from trying to enforce this and sticking folks with a lot of egregious arbitrary penalties. Maybe in 2020 or 2021, your bitcoin wallet will be considered a foreign bank account and you will have to include it on your FinCEN filings.
FATCA sucks. I avoid it by using my Taiwanese passport and holding everything in my Taiwanese bank. This is why I don’t believe in crypto anymore, it’s main value was being unregulated off the governments radar. Now it’s not. My only regret is spending my bitcoins on weed instead of saving it.
Thanks for the heads-up. I kind of figured this was coming.
Sounds like a pretty expensive smoke! Why so keen to avoid FATCA though? Maybe your situation is beyond me, I’m not sure what you could be out by doing so, but if they ever find out they don’t like it. I had a friend get into trouble over it in really petty circumstances.
Complications and paperwork. It’s just simpler to open a bank account with my Taiwanese passport. Banks are annoyed by it too so they don’t mind.
Filing is a breeze. Its the penalties incurred because someone didn’t know that they were supposed to do it. US$10k each offense.
Well at least I have job security. But I tell you what, I’d flip burgers if IRS and FinCEN would burn.
Just because they aren’t reporting it, doesn’t mean that this is acceptable to IRS. I’m not judging, I just wanted to give you a heads up that you are in fact, out of compliance if you haven’t renounced US citizenship and it is over $10k
I will once I start working. For now, I don’t because I still use family money mostly while I’m doing full time at Uni. And my dad never reported his salary in Taiwan to the IRS. Only his salary from the US. So I don’t want them snooping around wondering where the money I get comes from.
Thank you for your honesty and the cautionary tale. 
That’s interesting. Last I heard, the legal status of all crypto in Canada was that it’s a commodity.
@Bree, any updates?
How do Americans comply with IRS/Treasury regulations in this regards?
Do exchanges provide 1099s, or it’s all up to individual owners to track holdings in some excel spreadsheet? Seems like one big mess. Thx.
What I know isn’t as solid as I’d like it to be. We aren’t much further along than a year and a half ago. The IRS still has not issued regulations on this. From what I have read, and what colleagues are doing is reporting any ‘foreign held’ crypto over US$50k on an 8938. Crypto isn’t considered currency, so it doesn’t belon on a 114. This is good in that the 8938 has a higher floor. How you define ‘foreign held’ hasn’t been clarified. Good luck.
Only if the crypto is held in a brokerage account, then there is likely a 1099, but the cypto portion may be in the supplemental section not reported to IRS. My clients mostly use spreadsheets, and each one uses it differently. One or two use a tracking software designed for tracking puts/calls, but have adapted it to cross-crypto transactions.
It’s not covered by Publication 544?
Two things wrong with that. First, it was 2014, second, it’s a pub. Counterintuitivly, instructions and pubs cannot be used as authority. These are interpretations of law and citing them won’t hold up in court. It is best to look at source documents such as court cases, chief counsel memos, revenue procedures, and the code itself. While there hadn’t been much guidance since 2014, Rev Ruling 2019-24 is a start. Until the IRS issues something concrete, it ‘may’ not be enforceable, but I don’t want to be the guy to find out.
Remember you need to check ‘yes’ on schedule B even if you don’t normally file a sch B. New on schedule 1 is another box asking about crypto. Don’t fail to check these boxes. IRS is definitely leading up to something here, and failure to do so could set someone up for civil and /or criminal charges.
Never mess with IRS.
I have not dipped into cryptos (but am self-educating myself from YouTubers to understand alt-coins, etc.), just for the reason of the headache it would create to track holdings, etc.
Am listening to chat forums of coin developers, and it’s extremely interesting in what’s going on.
A few have hinted that their tax liability will be big for 2021, given the moonshots of so many cryptos. Most other users are non-Americans.
One thing someone mentioned, @Bree, and you are more knowledgeable, but if a crypto trader/investor Never converts back into USD hard currency (like normal bank account), then no need to report capital gains? This true?
That person who said this seems to imply that if an American keeps holdings within the crypto world, then no tax liability.
But at some point you want to cash out, right? Not just hold forever. Or maybe you want to buy pizza and pay rent with crypto? If you convert to cash, or exchange the crypto for valuable goods or services of any kind, that is a taxable event and you could be on the hook to pay capital gains tax.
If you’re a U.S. person who wants to invest in crypto long term, look at a self-directed Roth IRA. Not available from the large investment houses, but one can be set up from some smaller providers. A bit more complicated and expensive than a regular trading / investment account, but I believe it gives a saver - investor the best chance to protect the large potential gains that could be made from investing in crypto, real estate, and other investments. This is a long-term investment plan to provide for retirement, and requires some self-education to handle your own account.
For myself, yes, I would likely be looking to cash out and bring proceeds back into the normal financial system.
For those cryptos developers/traders, I am guessing that they feel they can keep all their proceeds in the crypto world and just buy non-valuables (food, etc.) with pancakeswaps, dogecoins, etc.
Then you will pay capital gains tax on the increase in value. At least that’s what the IRS will hold you to if they find out!
If you want to hold crypto (or any assets) for another 15 to 20 years or more, it would be worth setting up a self directed Roth IRA. Need a good advisor who understands the strategy, to discuss whether it makes sense in your specific case.
This was part of my original post that came to fruition. Crypto is considered property, not currency. If you exchange one type for another, it is a reportable transaction. In years past, you may have been able to call it a 1031 exchange, but that only applies to real estate now. So trading some litecoin for dodge will result in a capital gain or loss.
I like @jmee 's strategy. If it is inside of a Roth, then no one cares.