How to report interest income on foreign bank accounts

[ay66026]

Babupol, did you get any answer to your question? Do you have to pay tax on foreign interest even when you have a loss due to USD appreciating in value against the rupee?

[Mike9241]

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country.

Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income. You can generally get exchange rates from banks and U.S. Embassies.

the decline in value of your investment may be deductible when you liquidate it. 

[ay66026]

Thanks Mike, but for a savings acct there seems no place to deduct the loss. For example:

Convert 100USD to 500Lira, then assume you get 20% interest on lira = 100 lira interest

Through the end of the year USD appreciates against lira and FX conversion moves from 5 to 8.

At the end of the year 500lira principal PLUS 100 lira interest gives 600 lira total, which can be converted to 75 USD as the USD appreciated strongly.

In this case we report 12.5 USD as interest (12.5USD=100 lira) and pay tax on 12.5USD. However, the total value of the account in USD terms went down from 100USD to 75USD. Where can we report that $25 loss? 

[Mike9241]

that 500 Lira is now worth $62.50  for which your cost basis is $100

you report the 100 Lira received as interest income on your US return as $12.50 which apparently you left in the a/c. so the 600 lira is now worth $75

your US tax basis is the original $100 + the $12.50 in interest. if and when the a/c is liquidated say for $75.00 you report a foreign exchange loss of $37.50

you don't get the loss on the decline in value until you liquidate the a/c. from a tax standpoint you really don't know your loss until it is liquidated.  the value in US $ could go up or further down.

I should point out that if you withdraw the money to use for personal purposes, the loss in that portion is not deductible. 

[ay66026]

Thanks so much @Mike9241 , makes a lot sense.

Liquidating the account means just closing the account, right? At the end of every year, I can close the savings acct and move the money to a new savings acct, so that forex loss always stays low; otherwise it seems that forex loss is considered capital loss, which IRS limits to 1500/year to be deducted. I assume we report the forex loss as part of SchD capital loss. This way, money is not withdrawn for personal purposes, but rather it is used to create a new savings account every year. Is this what you meant below, or you meant forex losses can only be deducted if we operate a forex trading business?

[Mike9241]

didn't you say what you have is a savings a/c. that's not what's meant by a Forex a/c

A forex account is an online platform account used for holding the forex currencies and trading them. A trader will usually open a forex account, deposit money in the account using the currency of the home country and then sell or buy currency pairs. 

however, if you are doing Forex trading this is how you report it

FOREX traders have the ability to trade two primary forms of contracts. FOREX options and futures contracts are commonly classified by the Internal Revenue Service as IRC Section 1256 contracts. Because of this, traders will receive a unique 60/40 tax consideration, which means that 60 percent of any gains or losses reported under Section 1256 will be considered long-term capital gains or losses, and 40 percent will be classified as short-term gains or losses.

This method of trading differs greatly from the standard OTC, which is classified by the IRS as a Section 988 contract. Here, investors will be required to report any losses or gains as they would with ordinary loss/gains accrued throughout the year. As a general rule, the FOREX marketplace considers an OTC contract to be any contract that is settled within 48 hours of its initiation.

 a savings a/c would be section 988 as follows from the code

(1)Section 988 transaction
(A)In general
The term “section 988 transaction” means any transaction described in subparagraph (B) if the amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction—
(i)is denominated in terms of a nonfunctional currency,

(B)Description of transactions
For purposes of subparagraph (A), the following transactions are described in this subparagraph:
(i)The acquisition of a debt instrument or becoming the obligor under a debt instrument.

(C)Special rules for disposition of nonfunctional currency
(i)In general
In the case of any disposition of any nonfunctional currency—
(I)such disposition shall be treated as a section 988 transaction, and
(II)any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).
(ii)Nonfunctional currency
For purposes of this section (IRC Sec 988) , the term “nonfunctional currency” includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.

any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be).

[ay66026]

Thanks @Mike9241 . I am so sorry for unintended confusion on my part. I am only interested in savings acct treatment.

I understand that in the case of savings acct the loss (due to depreciating lira) will be ordinary loss. You said that to realize the loss due to lira depreciation it must be liquidated. Can I close the account at the end of the year and move the money to a new savings acct (just to liquidate it and realize the ordinary loss so that it can eliminate the tax burden coming from the interest part) ? For example, you make 20% interest in lira and lira depreciates 20% against USD in the same year, then by closing this acct and moving the lira to a new savings acct, I avoid paying tax on the 20% interest as interest income is neutralized by the same amount of lira depreciation?

[geauga]

Hi 

Thanks to all those who contributed to a question from geauga. In this post, I will give further clarification of my initial post of last year. 

Before taking up tax residency and citizenship in USA, I had some fixed deposits in foreign currency.  Since then, I went on getting them renewed after every 3 years.  At the end of each year, I went on paying taxes here in USA on interest incomes on those deposits.

 I have now closed some of my old deposits and got proceeds here in USA. 

I notice that proceeds my original deposit of say $100 (converted from foreign currency in US$) in year 2000 is now reduced (after earning 6% to 10% compound interest in each term)  to $75 in 2020 because of depreciation of that foreign currency.    It means loss of $25 in capital plus US taxes that I paid during the last 20 years on that deposit.   Here are my questions:

1.   How do I calculate capital loss of a fixed (term) deposit because of depreciation in a foreign currency? 

2.   Where do I report capital loss in schedule B? 

3.  Any other suggestion. 

Thanks again, geauga 

[AP1]

How did you fill this?

Was Payer ID left blank. I am facing this same issue.

[LinaJ2020]

I will suggest you to enter under "Other Income".  Here are the steps:

In TurboTax online,

• Sign into your account, select Pick up where you left off
• To the right upper corner, in the search box, type in "other reportable income" and Enter
• Select Jump to other reportable income
• Next screen, Other Wages Received, select No to continue
• Next screen, scroll down all the way to the bottom, under Other reportable income, select Start
• Next screen, Any Other Taxable Income? select Yes to continue

This amount will show on line 8 of Schedule 1 and Form 1040.  As long as it is reported on your tax return "somewhere", IRS will accept even though it was not reported on line 2, the interest line.  

[PRIYA200892]

Hi, 

I am facing a similar case. Can you please share your experience ? 
should I add India interest income (converted to usd) and US interest income and enter as one single value ?

Separately, for FBAR how do you declare the Mutual Funds value during the year ? 

[LinaJ2020]

I will suggest you to separate them into two transactions, just to be clear. However, the total amount should show on line 2b on your Form 1040 as an taxable event. 

Regarding FBAR, to enter your mutual fund account value, here are the steps:

In TurboTax online,

• Sign in to your TurboTax account and select Pick up where you left off
• At the right upper corner, in the search box, type in "foreign assets" and Enter
• Select Jump to foreign assets
• Follow prompts
• On-screen, "Amounts Related to Foreign Financial Assets", enter information

If you live in the US and meet one of the following criteria, you would need to file a Form 8938.  

Unmarried individual (or married filing separately): Total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.

Married individual filing jointly: Total value of assets was more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.

[PRIYA200892]

Can you please show a screenshot or some detail around what you mean by - line 2b of form 1040? Not sure what this means. 

Also, under what criteria do we need to file FBAR ? 

[LinaJ2020]

Please see image below.

If you met the requirement abovementioned, you need to file Form 8938.  Follow prompts as I explained above and let the program fill out the form for you.  

[PRIYA200892]

Thanks for your response. But while trying to fill in all in details on TurboTax, I did not find this screenshot contents anywhere. What am I missing here ?