Form 3520: Foreign Gift or Foreign Inheritance of Cryptocurrency and Other Assets 

Introduction 

Say you receive a foreign gift or foreign inheritance from a non-U.S. taxpayer individual of cryptocurrency or other property or assets, including cash: First, the good news – the foreign gift or foreign inheritance is not taxable to either the foreign donor (giver) or the U.S. taxpayer donee (recipient) – you receive the gift tax free. The bad news, check out these potential filing and disclosure requirements (including Form 3520)! 

Example: Assume you are a single U.S. taxpayer (note, your citizenship or visa status is irrelevant– these rules apply to every U.S. taxpayer).1 In calendar year 2020 your parent (a non-U.S. taxpayer) makes you three foreign gifts on different dates, of: (i) $50,000 in cash; (ii) stock in a foreign company worth $75,000; and (iii) cryptocurrency worth $100,000, for a total of $225,000.2 Assume the cash was deposited into a foreign bank account owned jointly by you and your foreign parent. What were your U.S. tax obligations? 

Tax Reporting Obligations

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 $100,0003 [See my Form 3520 video for more details] In our example, you received foreign gifts worth $175,0004 [See 4 reportable on or before the due date of your 2020 income tax return, either April 15, 2021 or October 15. 2021 if you properly filed for an extension. Since you did not timely file Form 3520, you could be subject to huge penalties, 5% per each month the return is late, to a maximum of 25%. Form 3520 is a separate and independent filing obligation and must be paper-filed with the IRS in Odgen, Utah. The statute of limitations for IRS to assess this Form 3520 penalty is suspended until three years after the return is filed, which effectively means that IRS can assess the penalty at any time until you file Form 3520 and then three years after the Form 3520 has been filed.

FBAR: Because there was more than $10,000 in your jointly-held foreign bank account in 2020, you were obligated to file an FBAR (Report of Foreign Bank and Financial Account) by the due date of your income tax return, with regard to extensions, similar to the deadline for filing Form 3520. The FBAR is filed on-line and is a separate and independent filing obligation. The FBAR also applies to stock, securities, or cryptocurrency held in a bank or brokerage account (or similar institution). There is a six-year statute of limitations for FBAR penalty assessments.5

Form 8938: Your foreign financial assets exceed the $50,000 threshold for single filers ($100,000 for joint filers residing in the U.S.); therefore, you needed to file Form 8938 with your income tax return. Your foreign bank account (even though it is a joint account) and stock holdings are foreign financial assets and your cryptocurrency might be a foreign asset if it is held by a foreign exchange or foreign financial institution. The penalty for failing to file Form 8938 is $10,000 per year and there is no statute of limitations for assessment of the penalty until three years after the form is filed.6

Form 1040: On the first page of Form 1040, IRS asks, “At any time during 2020, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? Yes or No.” You must answer this question “Yes” because you received a foreign gift of cryptocurrency. Note receipt of cryptocurrency, 7 whether from a U.S. or foreign person and whether by exchange, gift or inheritance requires a “Yes” answer. Although there is not a specific penalty for failing to accurately answer this question, it is clearly a badge of fraud if you supply a false or misleading answer and remember you file tax returns under federal laws of perjury. In short, there are criminal tax fraud implications if you deliberately falsify your answer to this question. Failing to answer the question in circumstances where you were required to answer “Yes” amounts to fraud, so don’t be clever and not answer the question. 

Other issues: If your ownership interest in the foreign corporation is 10% or more, you could have a Form 5471 filing obligation. There is a similar, although not identical rule for foreign pass-through entities, such as partnerships or limited liability companies. If the foreign stock was held in a foreign mutual fund or other passive investment, you could have a PFIC (Passive Foreign Investment Corporation) Form 8621 tax issue. The PFIC rules can be extremely complex and only a handful of CPAs are qualified to handle them. Also, PFICs may have potentially punishing tax rates. Note: PFIC issues routinely arise when you use a foreign financial advisor to administer your investment portfolio, since they often buy foreign stock or bond mutual funds, subjecting you to the PFIC rules. Also, foreign retirement plans and foreign trusts may cause PFIC issues. 

Conclusion

What appeared to be a simple foreign gift or foreign inheritance transaction with no immediate tax consequences may generate a multitude of reporting duties. A foreign gift or foreign inheritance of — 

  • Cryptocurrency could trigger Form 3520, Form 8938 and FBAR filing requirements, as well as a Form 1040 virtual currency disclosure. 
  • Cash or assets could trigger Form 3520, Form 8938 and FBAR reporting obligations. 
  • Foreign stock or securities could spark Form 3520, Form 8938, FBAR (if the stock is held in a foreign financial account), Form 5472 and PFIC filing duties. 
  1. Note: Those who are physically present in the U.S. illegally still must comply with U.S. tax law and these rules apply to illegal assets or substances as well. In general, the tax code makes no distinction between legal or illegal activities or assets. 
  2. Note: non-cash gifts are priced at fair market value at the time of the gift. 
  3. Note: Form 3520 is required for foreign gifts or foreign inheritances of $18,567 for 2023 (adjusted annually for inflation) received from a foreign entity, such as a corporation, partnership, LLC or trust. 
  4. The foreign gift amount is only $175,000 because deposits into a joint account are not considered a completed gift until you actually withdraw the funds or your parent dies. At that point, the foreign gift and foreign inheritance rules apply.  
  5. The penalties range from $10,000 for a non-willful failure to as much as 50% of the amount in the account or $100,000, whichever is higher, if IRS concludes you willfully failed to file the FBAR. Penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty. 
  6. As with other international form filing penalties, Form 8938 penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty. 
  7. The 2022 Form 1040 does not require a “Yes” answer if cryptocurrency is purchased.