by Roger A. McEowen
As if estate planning wasn’t difficult enough, digital assets now have to be factored into the mix for some clients. There are many digital currencies, but Bitcoin (a virtual store of value that functions as a medium of exchange) is the most prevalent. It has an equivalent value in real currency, and it’s value has fluctuated greatly recently. You can track it’s value at www.coinmarketcap.com. In late March, the IRS issued Notice 2014-21 which notifies the public how IRS will treat virtual currency as property for federal tax purposes. IRS noted that it will treat Bitcoin as property (rather than currency) and that it has an income tax basis. Whether it is a capital asset or a non-capital asset depends on how a taxpayer uses it. If the taxpayer mines it, any resulting gain will likely produce ordinary income. That activity would seem to be synonymous with the mining of other commodities. Likewise, for those that are dealing in Bitcoin to an extent that the activity rises to the level of a trade or business, the income from the activity would also be ordinary in nature.
Recently, IRS said that persons named as agents under a Power of Attorney, have signatory authority of the principal’s bank accounts that triggers the same FBAR filing requirements that the principal is subject to. What if a Bitcoin is maintained on a computer server that is located outside of the United States? What if a U.S. resident lives abroad and keeps Bitcoin on a personal computer that they keep with them? Does that trigger the FBAR reporting requirements? The IRS Notice didn’t answer that issue. But, it’s vitally important due to the penalties (civil and criminal) that apply under FBAR. Given that Bitcoin can fluctuate wildly in value, the possibility that the account could exceed $10,000 at any time during the year is very real, along with the associated penalties.