Bitcoin – Further Development on Foreign Reporting

These days, bitcoin has been a growing topic with my clients. Therefore, to wrap up our series on bitcoin blogs, Part I and Part II, I thought I would share my recent research for a client on the taxability of mining bitcoins and on their Report of Foreign Bank and Financial Accounts (FBAR) when they are held in a digital wallet.

Regarding the taxability of mining bitcoins, it is not a matter of mining being subject to tax. It is a matter of proper determination of the amount, the timing and the characterization of the gain. During my research, I came across two great articles on Forbes.com that covers, in detail, the taxable outcome of mining bitcoins.  I recommend these two articles for additional reading on the subject:

As for my research on FBAR, I was having trouble finding information on the topic. Therefore, I called Offshore Voluntary Disclosure Initiative (OVDI) Hotline. I thought to myself, “What could be a better resource?” Even though they were not able to answer my question directly, they pointed me in the right direction of their tax law unit.

Luckily, I heard back from them in just one day. The IRS response was, “Digital currency like Bitcoin would only be reportable if it is held in an account with a financial institution or someone acting as a financial institution. This is not the way Bitcoin works. The whole idea behind Bitcoin is that it avoids dealing with a financial institution. It is digital currency held in a digital wallet, not in a financial institution. The digital wallet is not a foreign financial account. In that form, it is not reportable on FBAR.”

I can only assume, since many people are investing in bitcoin these days and using them as currency to pay for certain products, the IRS will have to issue some guidance to add clarity to reporting. Stay tuned…