That is a very good question. The answer to is that you should report your interest income earned on your Indian bonds as taxable interest on your United States tax return (through the Form 1099-INT interest income interview, even if you did not receive an actual 1099-INT). Your interest income will be ordinary in nature, which would make it a Box 1 entry. Use the prevailing US Dollar - Indian Rupee exchange rate to convert the interest paid into US dollars for tax reporting purposes, if necessary.
The maturity of the bonds (and any gain or loss thereupon) is a separate issue from the interest income of the bonds. For this, you will want to treat your matured (or sold or redeemed) bonds as the disposition of a capital asset. This means that you will make an entry for your bonds in the Investment Income -> Stocks, Mutual Funds, Bonds, Other section of TurboTax. That will eventually get your bond disposition reported on Form 1040, Schedule D, where it belongs.
To navigate there in TurboTax, you can follow these steps:
- Click on Federal Taxes
- Click on Wages and Income
- Click on I'll choose what I work on
- Find the Investment Income sub-group
- On the line for Stocks, Mutual Funds, Bonds, Other, click the Start or Update button
For
US tax purposes, treat the purchase price and redemption price of your Indian bond investment like this. Translate the original purchase cost of the bonds
(from Indian Rupees to US Dollars) at the then-prevailing 2011 exchange
rate. Translate the redemption price (from Indian Rupees to US Dollars) using the 2016 exchange rate. If the Indian Rupee has
depreciated (appreciated) against the US Dollar during that time, then you can report a
US capital loss (gain) upon maturity / redemption of the bond. . . while at the
same time paying US taxes on the interest earned on the same financial
instrument.
Does that process make sense?
There are many places on the internet where you can look up such
historical values for any currency pair, so that part should be fairly
easy and purely mechanical.
Also, it is helpful to note that the
foreign exchange conversion rules discussed here for purchase and disposition apply to
any asset or other investment, and not just foreign bonds. In other
words, you'd apply them to stocks, bonds, partnership interests, real property,
mortgage payments, etc.
This
concept is a long-standing principle in international taxation, as well
as international financial (non-tax) accounting; and it applies to
taxpayers whose primary currency is the United States dollar.
It is discussed in layman's terms on the following official IRS.gov webpage (but without any corresponding legal citations):
https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates
In particular, there is a relevant quote there that reads:
"Make
all income tax determinations in your functional currency. If your
functional currency is the U.S. dollar, you must immediately translate
into dollars all items of income, expense, etc. (including taxes), that
you receive, pay, or accrue in a foreign currency and that will affect
computation of your income tax. Use the exchange rate prevailing when
you receive, pay, or accrue the item."
Really, when you take a
moment and think about it, the basic underlying principle is logical,
and it makes good common sense. To disaggregate foreign currency
exchange rate fluctuations from price movements in the underlying assets
would just add another layer of complication to an already cumbersome
tax code. By having such a straightforward foreign currency rule in
place (i.e., translate all transactions completed in a foreign currency
back to U.S. dollars at the moment in time they occur), it simply makes
things easier. This is true both for the taxpayer, and for the
government (in their role as potential tax auditor).
Thank you again for asking this question, and good luck with your future investing.
