Doubt Regarding reporting Sale of Mutual Funds in India

[legolas2025]

Background for person under consideration: 

• Came to the US in August 2021 on F1 visa
• In 2021, 2022 and 2023, filed returns as a non-resident for tax purposes because was on F1 visa (OPT or STEM)
• Finally in Feb 2024 switched to O1 work visa, and since he crosses the substantial presence test for 2024 because of being on this work visa for >183 days in 2024 itself, choosing to file taxes as a resident for tax purposes for the whole year. 
• In 2023, had some income in India due to the sale of some mutual funds in India. Declared those truthfully on the tax software (Sprintax). This did not affect his federal return because form 1040-NR doesn't tax foreign income for non-residents. This declaration did affect CA state return (reduced his tax credit/rebate) which is also fine because CA does tax total income.

In 2024, as mentioned above, filing as a US resident (form 1040).

There is profit of approx. USD 6200 from Sale of Mutual Funds in India. The breakdown of these is below.

Chunk 1 was bought in January 2021 for INR 500000 (USD 6856.85 as of that day)

Sold in Feb 2024 for INR 735858 (USD 8872.09 as of that day)

Profit is INR 235858 (USD 2843.69 as of sold date)

Chunk 2 was bought in Oct, 2021 for INR 500000 (USD 6704.90 as of that day)

Sold in Nov, 2024 for INR 791648 (USD 9379.84 as of that day)

Profit is INR 291648 (USD 3455.59 as of sold date)

Total profit in 2024 was INR 527506 (USD 6166 as as conversion rate at end of year)

The questions we have are the following:

• Is he required to declare this India income while filing his federal and CA tax returns?
• If the answer to both is yes, how do we do that in TurboTax? Which forms need to be filled? Exactly which fields/forms will reflect this income? As you can see, the income/profit is around $6200, the assets have crossed $10000 at some point in the year (February probably), but the assets have never crossed $25000. The answers online include conflicting opinions on whether to declare this as ordinary income like US stocks with no 1099-B, declare it as miscellaneous income, declare this as PFIC, fill form 8621, and so on.
• Also, how exactly does the conversion INR to USD take place - should we convert them as above on the day, and then take the difference, or we take the difference in INR, then convert it to USD? The second approach sounds more logical, because I never actually transferred money from the US to India or vice versa ever. The investment source was also in India, and the sale money is also gonna be there.
• Lastly, taxes on Chunk 1 in India  are already paid while filing taxes in June 2024 for FY 2023-24. The taxes on chunk 2 will be filed in May/June 2025. Is there a way to get credit for those taxes in our US return (like a double taxation avoidance treaty)? And is the path to do that simple, or is it simpler to just pay incremental taxes without getting credit for the India tax? 

Wanna do what is correct. Would appreciate it if we can get this opinion from a U.S. CPA or tax expert who is a subject matter expert and has the relevant knowledge & experience on this matter. 

[pk]

@legolas2025  my comments / answers  are in italics

The questions we have are the following:

• Is he required to declare this India income while filing his federal and CA tax returns?  
•              As a US person  ( in your case Resident for Tax purposes ), you are taxed on your world income.  Thus you have to recognize  all incomes  -- no matter wherefrom and what type-- and  pay taxes  on that income.
• If the answer to both is yes, how do we do that in TurboTax? Which forms need to be filled? Exactly which fields/forms will reflect this income? As you can see, the income/profit is around $6200, the assets have crossed $10000 at some point in the year (February probably), but the assets have never crossed $25000. The answers online include conflicting opinions on whether to declare this as ordinary income like US stocks with no 1099-B, declare it as miscellaneous income, declare this as PFIC, fill form 8621, and so on.
• Do not understand the reference to US$10,000 and/or US$25,000.  Foreign Mutual funds  etc. are generally regarded as PFICs by the US and thus the requirements of  section 1297 and update of section 1061 are the ones I am aware of 
• Also, how exactly does the conversion INR to USD take place - should we convert them as above on the day, and then take the difference, or we take the difference in INR, then convert it to USD? The second approach sounds more logical, because I never actually transferred money from the US to India or vice versa ever. The investment source was also in India, and the sale money is also gonna be there.
• Generally  for foreign currency based  transactions while assuming your operating/functional currency is US $, one is expected to use  dollar of the day  conversion i.e. you convert to US $ using the daily/published  rate  on the day the  transaction took place.  Thus  if you bought  an asset  in India  on  July 10th of 2021 -- your basis  for that  asset  is US$ XX  using conversion rate for that day.   Again  when you dispose of that asset on   October  15th of 2024, your sales proceeds is US$ YY using the FMV ( Fair Market Value ) and the  INR to US$ conversion for that day.  You gain  on this disposition  is  US$ YY LESS US$XX.  Does this make sense ?
• Lastly, taxes on Chunk 1 in India  are already paid while filing taxes in June 2024 for FY 2023-24. The taxes on chunk 2 will be filed in May/June 2025. Is there a way to get credit for those taxes in our US return (like a double taxation avoidance treaty)? And is the path to do that simple, or is it simpler to just pay incremental taxes without getting credit for the India tax?  
• Yes  the  difference in Tax Calendar between India  (  e.g.  Apr 1st  Year 1 to Mar 31st of Year 2 ) and that of the US ( Calendar year ) does create  issues.  You can always use the TDS ( estimated withholding effectively ) to file the US taxes and  amend the return when  ITR has been filed and accepted by the IT department  OR  wait to file the US return  ( with an extension ) till the Indian ITR has been accepted.

A point to consider here  -- assuming that  you did not have any  dividend  or similar distribution during the period of holding of the  PFIC  ( Indian Mutual Funds are generally considered as PFICs ) and/or you have not filed any 8621s,  there are complications to consider here.  Ideally  there should have been 8621s filed  yearly during the holding period.  From a  tax perspective ( assuming no actions were taken priorly )  treating this sale as ordinary income may  satisfy  the bulk tax amount.  I would strongly recommend a discussion with a tax professional familiar with PFIC and international taxation.

Is there more I can do for you ?

[legolas2025]

Hey @pk 

In terms of the forms to fill, please correct me if I am wrong here -

1. DO need to fill FBAR form because at any point of the year my assets crossed $10000. This is separate from my tax return and needs to be filled if total assets including everything ever crossed $10K in the year.
2. DO NOT need to file 8938, because my assets never crossed $50K on the last day or $75K on any day in the year. 

The sales are to be reported in Schedule D (8949) or in the 8621 form - this is an 'either or' question, or both need to be done?

Regarding the conversion

And lastly, regarding the INR to USD conversion - I understand your method. You say that the conversion should be done on that day's rate (for buying and sale) and then take the difference. But because I have not actually transferred USD to INR or back, should I not just use the average rate from here: https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates and simply convert the exact INR profit into USD using 2024 exchange rate? Could you please provide a reference for your method - I understand your method, but is there somewhere I can read that it is the correct way?

Regarding the Foreign Tax Credit

Deciding to avoid taking this credit, if it making things too complicated.

[legolas2025]

One more thing to note @pk is that this is the first year the treatment is as resident for tax purposes. So there was no 8621 filed in previous years. And this year the sale has ensured that there are no more assets abroad anymore as of the year end. So what is the simplest way to pay taxes on the profit? Even if it is not the cheapest, that is fine.

I am still confused about 8621 vs. Schedule D (8949) based declaration.

[pk]

@legolas2025 , having gone over the whole thread, I am not convinced  you need any more help  or that I can provide any more useful in put.

If there is  specific issue you need help with, you are welcome to add to this, else  ....

Namaste ji

pk