Forex losses on 10-year CDs - report as ordinary loss on Section 1, line 8 of 1040 or as losses on Schedule D?

[rset]

Hi,

I was looking for clarity on how to recognize losses on a 10-year CD that I had invested in a foreign savings account. The CD was intended to be an investment - no personal transactions have been conducted in the savings account . I paid taxes on accrued interest on the CDs via Schedule B every year.

Say I put in $100 at time 0, and received interest of $8, 9, 10, 11, 12, 13, 14, 15, 16, 17 (totaling $125) in yrs 1..10- so my cost basis is $225. Upon repatriation, because of adverse FX moves, I received , say only $150.

1) Can I take $75 ($150-225) as an ordinary loss as per Section 988? In my view, there is no capital gain/loss involved as the CD par amount was effectively 100 both at time zero and 100 at maturity - so the entire loss is because of forex moves.

2) Do I report this in Other income, Form 1, line 8 in Turbotax? For description, do I just say something like "Foreign exchange losses on 10-year CDs" or need to enter something else?

3) Do I need to attach any other documentation to my return?

Some experts have said that instead of taking 988 losses, I need to use schedule D. Others have said that FX losses on CDs cannot be taken at all because they are personal transactions, not investments. 

Even the reply from the FX experts on this forum seems to be different (For instance, see the response  https://ttlc.intuit.com/community/taxes/discussion/foreign-currency-loss-section-988/00/2527216 by Mike9241 vs more recently under https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-section-988-certif... by DaveF1006)

Mike/Dave, is it possible to give your latest thoughts, and reconcile your views on my query? Thanks for the guidance

[DaveF1006]

No it is not possible to claim a 988 loss on a foreign CD account. 988 losses are related to currency traders trading on the Forex exchange and not from losses from foreign bank accounts.

Only losses that can be claimed as capital losses claimed on Schedule D are from the sales of stocks and bonds but not from interest or dividends.  This is true for both domestic and foreign accounts.

@rset 

[rset]

@DaveF1006, Thank you for your response. Just for clarification, my situation seems to  what @@@AC125 raised a few weeks ago (https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-section-988-certif...).

However, your guidance for me seems to be different vs. the query he raised. Am I understanding this correctly, or is there a difference in my situation vs his  that has led to a different interpretation on your part? Thanks for any clarification.

[DaveF1006]

Please read the following IRS reference regarding the definition of a Section 988 transaction.   Section 988 transactions include debt  instruments, payables, receivables, forward contracts, futures  contracts, options  or similar instruments  denominated  in any  nonfunctional  currency asset.    

CD's or other assets are not specifically mentioned in this publication so I would err on the side of caution in trying to declare this as an ordinary loss. i suppose you can make a case for yourself as Mike9241 mentions if the loss was due to currency devaluation but if it was due to declining interest rates, then this would not be a 988 loss.

Use your best discretion.  Interest and Dividend losses are not allowable for US tax purposes and should not be allowable for foreign as well. This is the position that I take although others may take a contrary view.

@rset 

[rset]

@DaveF1006 Thank you for sharing the IRS Reference document on Section 988. It seems like I can apply section 988 on the forex losses as long as I can demonstrate:

1)  a CD is a debt instrument (although not specifically mentioned in the reference guidelines).  For instance, the answer to the question, "Is a cd a debt instrument?" on wikipedia, or for that in any fixed income textbook is - "Certificates of deposit (CDs) and bonds are both debt-based, fixed-income securities". Also, many CD's are routinely traded like securities in the marketplace. Economically, of course, there is no difference between a CD and a zero-coupon bond with the same maturity. So, my hope is that common sense can prevail.

2) prove the funds were meant as an investment, not a personal transaction . To this effect, the fact that I invested in a 10-year CD, rather than 3-month, 6month etc., should hopefully carry some weight. Along with emails demonstrating investment intent. Lastly, as I mentioned,  there were no other transactions other than the initial investment and repatriation, that were carried out /commingled in the specified account.

@DaveF1006 Would you concur with this?

Thanks again for your guidance - I am surprised this issue is not clear cut for CDs - for foreign bonds, the guidance seems pretty straightforward.

@Mike9241, do you think my interpretation above makes sense?

[DaveF1006]

Since I spoke to you last, I did find this interesting reference that may not be favorable to you. Here is a post i gave to a previous poster.

Actually what it says in this post is:

Coordination with section 988(c)(1)(C)(ii). No exchange gain or loss is recognized with respect to the following transactions -.

(A) An exchange of units of nonfunctional currency for different units of the same nonfunctional currency;

(B) The deposit of nonfunctional currency in a demand or time deposit or similar instrument (including a certificate of deposit) issued by a bank or other financial institution if such instrument is denominated in such currency. This is referring to conversion losses.

Thus gains or losses are not recognized in Section 988 transactions.

This subject is not as clear-cut as you might think. Because of the information discrepancies, I cannot concur with you but if you pursue claiming a loss, you have my blessing. Be sure you can back up your position if you are examined by the IRS. This is a gray area that is open to interpretation and tax experts may have differing opinions on the matter.

@rset