On December 30th, 2020 FINCEN (Financial Crimes Enforcement Network) announced that they intend to amend the regulations implementing the BSA (Bank Secrecy Act - the law that created FBAR filing obligations) to include virtual currency as a type of reportable account for FBAR reporting.

This change will not be as straight-forward as it may seem. There are a few different ways cryptocurrencies, like Bitcoin and Ethereum, can be held. We will dive into a more thorough review of the mechanics of cryptocurrencies in a later article, but for FBAR purposes, you need to understand that cryptos can be held (to use the language of FinCEN) in hosted wallets, unhosted wallets, or otherwise covered wallets. 

A hosted wallet is a crypto holding that is facilitated by a financial institution that is subject to FinCEN regulation(i.e. a domestic financial institution). The financial institution will initiate trades of the crypto on behalf of their customers and the financial institution will be in possession of the private key (think of the private key as a digital key used to unlock access to the wallet holding the crypto).

An unhosted wallet is a crypto holding directly held by the individual. A financial institution is not involved in the maintenance of an unhosted wallet. The individual has the private key that is utilized to facilitate transfers of the crypto.

An otherwise covered wallet is a crypto holding with a foreign financial institution. Similar to hosted wallets in all meaningful ways save the fact that the financial institution involved is a foreign financial institution.

This proposed change will make a U.S. person’s interest in a foreign account containing cryptos subject to FBAR reporting. This means that people will now need to know the domestic//foreign status of the financial institution that is handling their cryptos (for all wallets that aren’t unhosted wallets), and if the financial institution is foreign, they will need to report the maximum balance of any cryptos held in accounts with those financial institutions on an FBAR annually. 

Based on FinCEN Notice 2020-2, a notice that contains only a brief indication of the proposed changes, it is likely that Crypto holdings in unhosted wallets will continue to not be required to be reported on FBARs and also not included in determinations regarding whether an individual exceeds the $10,000 FBAR filing threshold. 

Unhosted wallets will not be reportable on FBARs because they are not held with foreign financial institutions. We will have to wait for the proposed regulations, but it would be a dramatic departure from established FBAR reporting principles for an asset held directly to need to be included on an FBAR. 

To use an accessible analogy, we can regard cryptocurrencies in a similar fashion to holdings of gold and silver. Having bars of gold in your home is similar to having an unhosted wallet that you maintain through your computer or mobile device. If you live abroad, both the gold bars under your bed and the cryptos in your pocket are foreign assets, but neither of them are held with a foreign financial institution and neither of them are reportable on an FBAR. But if instead of holding them in your home, you manage all of your transactions relating to your gold bars or cryptocurrencies through a financial institution that is providing you services in relation to those holdings and is executing purchases and sales of those holdings on your behalf, you have to include those foreign accounts on your FBAR annually.

This is only a notice of an upcoming proposed change to the FBAR regulations. This is letting us know that they intend to amend the rules. We will have to withhold judgment until we see the actual proposed regulations, but, either way, it is good to be on notice of any upcoming changes to the reporting obligations applicable to cryptocurrencies and the impact that these changes could have on your obligation to file an FBAR. This is especially true for individuals who may not otherwise have an FBAR filing obligation without factoring in their crypto holdings.