FATCA Reporting refers to the obligations mandated by the U.S. Foreign Account Tax Compliance Act, which requires foreign financial institutions (FFIs) to report specific information about financial accounts held by U.S. persons to the Internal Revenue Service (IRS). In the crypto context, this extends to digital asset platforms that meet the definition of an FFI.
Mechanism
Qualifying crypto exchanges, custodians, and other financial entities operating outside the United States must identify their U.S. account holders and report account balances, identifying data, and certain transaction details to the IRS, either directly or through their respective local tax authorities. This often necessitates robust Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.
Methodology
Compliance requires establishing secure data collection and verification systems to accurately ascertain the U.S. person status of account holders. Financial institutions must implement reporting frameworks capable of aggregating pertinent account information and submitting it in prescribed electronic formats, such as the XML-based FATCA reporting schema, to avoid penalties and maintain access to U.S. financial markets.
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