Form 3520: Foreign Gift or Foreign Inheritance of a Non-Fungible Token 

 Introduction: 

Lucky you! Your rich foreign uncle1 who made a bundle buying non-fungible tokens (“NFTs”) transfers an NFT to you as a foreign gift. The good news is foreign gifts (nor foreign inheritances) are not immediately taxed; however, there could be current IRS filing obligations (including Form 3520) with large penalties for non-compliance and a potentially painful tax bite when it is sold. 

Example: Assume as a U.S. taxpayer you receive an NFT from your foreign uncle worth $750,000 he acquired for $25,000 two years ago. Assume you received no other foreign gifts or inheritances and have no transactions involving cryptocurrencies. 

Form 3520: Form 3520 is required whenever you receive one or more foreign gifts or foreign inheritances from one or more foreign individuals during the calendar year when the aggregate fair market value exceeds $100,000.2 It is filed on or before the due date of your income tax return (Form 1040) for the year in which the gift was received, with regard to extensions. [See video for more details.] Since you received a gift worth $750,000, you have a Form 3520 filing requirement.3 The NFT is valued on the date of your receipt, not when your uncle purchased it. The penalty for failing to timely report on Form 3520 a foreign gift or foreign inheritance can be 25% of the amount (5% per each month the return is late for a maximum of 5 months) or $187,500, assuming a $750,000 value. 

FBAR: An NFT is an asset (a collectible), not a foreign financial account; therefore, you do not have an FBAR filing requirement, unless it is stored on a foreign exchange or platform, or with a foreign financial institution, which is unlikely but could happen. You still have a Form 3520 filing requirement because you received a foreign gift. 

  1. A foreign taxpayer is a non-U.S. resident and a non-U.S. citizen for U.S. income tax purposes. This differs from the usual test for a domestic gift, which focuses on whether the gift giver is a U.S. “domiciliary.” 
  2. Note: The reporting threshold for a foreign gift or foreign inheritance from a non-individual, such as a corporation, partnership or trust, is much lower, $18,567 for 2023 (adjusted annually for inflation). 
  3. Form 3520 is filed with IRS in Odgen, Utah, and not with your Form 1040. It is a separate and independent filing requirement. See the instructions to Form 3520 for details.