FBAR and FATCA compliance in the age of digital currencies.

• Author: Prasad, Rajiv
• Position: Foreign bank account reporting, Foreign Account Tax Compliance Act

Few--if any--requests for information about filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), or complying with the Foreign Account Tax Compliance Act (FATCA), RL. 111-147, include questions about ownership of digital currencies. But based on recent guidance and the popularity of these new digital currencies, it seems that they should.

In 2009, a programmer operating under the name "Satoshi Nakamoto" created a cryptography-based peer-to-peer digital currency known as "bitcoin." Recently, bitcoin has exploded in popularity online. In 2013 and early 2014, mainstream websites such as newegg.com, overstock.com, okcupid.com, baidu.com, and reddit.com began accepting bitcoins as a payment option. Bitpay, a bitcoin payment processor based in Atlanta, reported a more than tenfold increase in the number of merchants using its service in 2013. Numerous restaurants and retailers along the Pacific Coast now accept bitcoins in addition to cash and credit cards. Some overseas colleges have begun accepting tuition payments in bitcoins. This year, Olympic athletes from India and Jamaica used dogecoin, another cryptography-based digital currency, to help pay for their Olympic training and travel expenses.

Bitcoin is not backed or issued by any government. Instead, like precious metals, bitcoins are "mined" from the bitcoin network itself by virtual "miners" that process bitcoin transactions. Currently, the bitcoin network awards a small number of bitcoins to the first miner to process each block of transactions. There is a fixed "lode" of 21 million bitcoins that can be mined; 12 million of those have already been mined. Once the entire lode has been mined, bitcoins can be acquired only from existing holders. Once mined or otherwise acquired, bitcoins are stored as numerical balances located at "bitcoin addresses." A cryptographic private key is used to access the bitcoin address, somewhat like a combination to a safe. A user generally stores one or more private keys in a file known as a "wallet." Most digital currencies, including dogecoin, are generally similar to bitcoin but differ with regard to the lode of minable coins and the technical details associated with processing transactions of the respective currency.

Historically, the exchange rate between U.S. dollars and bitcoins has been extremely volatile, rising and falling by double digits numerous times over the course of its brief history. At the beginning of 2013, each...