On December 12, 2014, in Treasury Decision 9706 (the “Treasury Decision”), the IRS and the Treasury Department finalized the regulations under Section 6038D of the Internal Revenue Code (“Code”). With respect to digital currencies, the Treasury Decision notes that the IRS is considering the proper treatment of digital currencies under Section 6038D and, consistent with typical IRS administrative process, is soliciting comments from the public.
In general, Section 6038D requires U.S. persons who own certain “specified foreign financial assets” (“FFAs”) in an amount equal to or greater than $50,000 to file informational returns. Currently, there is no official guidance regarding whether digital currency qualifies as an FFA and it is unclear whether U.S. holders of digital currency “wallets” are subject to the reporting requirements. However, FFAs are broadly defined to cover, among other assets, “financial account[s] . . . maintained by a foreign financial institution”1 and also “any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person” not maintained by a financial institution.2
The fact that the IRS treats digital currencies as “property” (and not currency)3 has little impact on the Section 6038D analysis because the above definitions of FFAs are broad enough to encompass either. Beyond that, there remain a multitude of open questions to resolve in order to determine when (or if) digital currencies would be subject to such reporting: is a digital currency “wallet” a “financial account” within the meaning of Section 6038D? Under what circumstances is a foreign digital currency depository or exchange a “foreign financial institution”? And, perhaps, when is a wallet a “financial instrument . . . held for investment”?
Although the application of Section 6038D to digital currencies will depend in part on how these issues are resolved, Section 6038B would seem to apply only where the digital currency is “foreign” in some aspect – where the issuer is a non-U.S. person or the bitcoins or other digital currency are held in a non-U.S. account (i.e., a non-U.S. wallet). A digital currency user who purchases their digital currencies from a U.S. person or company and stores them with U.S. based depositories should not have Section 6038D obligations.
1 Code Section 6038D(b)(1)
2 Code Section 6038D(b)(2)(B)
3 Notice 2014-21, 2014-16 IRB 938