Report Capital Gains (Short and Long term) from foreign(Indian) mutual fund sale in turbotax

[viraj]

I am a Non-Resident Indian who is a tax resident of USA.

I invested in Indian mutual funds and did a sale of a few units during the year 2019 for which I was charged long term and short term capital gains. On that front, I have a few questions:

1. How do I report this in TurboTax?

2. How do I segregate between short term and long term tax?

3. How do I report the tax I already paid in India and get credit for it?

4. I also wanted to confirm if my tax liability would be as per US tax laws or Indian tax laws for short and long term capital gains.

[pk · Accepted solution]

@viraj , assuming that you are  a resident for tax purposes  for the whole year, 

(a) you report your sale of Foreign Mutual funds shares  just as if these were  in the USA --- US  tax laws  for citizen/Resident/ Resident for tax purposes  do not distinguish between    such  dispositions  between  US  and foreign. US taxes  such taxpayers on world income under its laws.  You tell TurboTax that you have Barter/Exchange  income   ( generally reported on 1099-B or Broker's consolidated  report ).  You have to go through this section of entries carefully because  you do not have a 1099-B  and because all these share basis  is  not reported  to the IRS.  Note that the basis/cost is as of the date bought  in US$ of the day-- not today's

(b)  it will also ask for  when acquired and when disposed  and therefore  will determine if it short or long term --- held for longer than 12 months   ( for long term and otherwise short-term).  It is a tabular entry form and all you do is enter the details of each share  .  Also note here that  unless  you instructed the  broker otherwise and you are  bought  shares  at different  times, the default is  First in First out

(c) Once you have gone through all the  data entry , Turbo Tax will segregate the  short term and long term  and the  gains and losses will be computed , adjusted etc. per the  US capital asset rules.  

(d) The tax treatment  of the  disposition  i.e of the proceeds would be per the  US tax laws  without regard to sourcing .  

(e) To recognize the   taxes paid to India  ( not the Held at Source but the final settled  amount ), you have to  file a form 1116 along with your return --- You will have to tell the TurboTax that you have foreign tax credit -- it will need the final taxes paid, the country where the  foreign income occurred and the  foreign income associated with the  taxes paid.  You can file now with the  withheld amount and then when the final amount is in place then file and amended  return or file  for an extension and after the Indian tax is settled  then file  the  US return.  Note that if you are itemizing  then it is possible to  take  a deduction for the taxes paid  rather than  go for the  tax credit

Does this answer  your  query?  Do you need more help / information ?

Namaste ji

[viraj]

Thank you @pk  for answering my question.

I have a couple of things that need more clarity:

"""

(b)  it will also ask for  when acquired and when disposed  and therefore  will determine if it short or long term --- held for longer than 12 months   ( for long term and otherwise short-term).  It is a tabular entry form and all you do is enter the details of each share  .  Also note here that  unless  you instructed the  broker otherwise and you are  bought  shares  at different  times, the default is  First in First out

"""

In the above statement, you mentioned the details of each share. Do you mean details of each transaction because mutual funds in India are considered long term and short term based on the units of the fund purchased and not the shares within the fund?

"""

(e) To recognize the   taxes paid to India  ( not the Held at Source but the final settled  amount ), you have to  file a form 1116 along with your return

"""

I have not paid taxes other than the taxes paid at source(TDS). Is the process to get credit for those taxes the same as interest income on bank accounts in foreign countries or is it via form 1116 as you mentioned?

[KurtL1]

To clarify the cost basis. When you calculate the cost basis when selling mutual funds is different than when you are selling individual stocks. You would use the Average Cost Basis instead of the first-in / first-out method.

To figure your gain or loss using an average basis, you must have acquired the shares (units) at various times and prices.

To calculate average basis:

• Add up the cost of all the shares you own in the mutual fund.
• Divide that result by the total number of shares you own. This gives you your average per share.
• Multiply the average per share by the number of shares sold.

The tax amount you would use when you complete Form 1116. is either the actual tax amount per your tax return or the amount you paid at the source (amount withheld). These amounts represent the estimated taxes on the sale of the mutual fund units you sold.

[ac203]

@pk and @KurtL1  Thank you for very thoughtful responses 

In my case, I sent funds to India over a two year period (2018 and 2019), and kept buying stocks.

Didn't sell anything in 2018; sold a portion of stocks in 2019 (still holding remaining), but didn't bring back any of the sale proceeds to US (i.e., proceeds still in India bank account in INR)

So now do I have two types of transactions to record? 

1. Capital Gain Loss on Indian stock (realized in 2019)

2. FX Gain Loss on the money i sent (not realized yet since i didn't bring the money back)

I can easily calculate my capital loss in INR using local currency purchase price and local currency sale price, but the question is how do I convert the txn prices (sale and purchase) to USD? There were several transactions to convert these for each transaction - over 30 transactions in various stocks.  Can I use average price at which i sent the funds to India to convert the INR to USD to report my losses now from INR to USD

That way I am keeping FX separate from capital gains

And when I bring the INR back to US, i can then report any FX gains / losses based on USDINR rate at the time

Could this work? And if so, how would i do this in TurboTax? 

[pk]

@ac203 ,  the   holding period   requirements  for stocks / mutual funds ( with underlying stocks ) for the USA is  one year  or more for long term  the rest that is held for less than one year is generally short-term  ( I think India uses a three  holding period  for long-term treatment)  and yes for Mutual Funds ( and similar  ) you use the l period you held the  fund shares NOT the underlying shares/ investments .

FX losses   are personal and  not an investment ( unless you are an investor in Forex  or Forex funds ) --- thus while the loss is not recognizable   ( casualty loss ? ) , the gain may be. 

Does this help ?

[ac203]

Thanks @pk 

Sorry for the delayed response; for some reason, I didn't get a notification that there was a response to my query and just saw your response 

Couple clarifications :

""

FX losses   are personal and  not an investment ( unless you are an investor in Forex  or Forex funds ) --- thus while the loss is not recognizable   ( casualty loss ? ) , the gain may be. 

""

I bought the INR ONLY for investment purposes; i.e., I didn't have any existing account in India, and opened an account specifically to trade Indian securities, which required me to buy INR.   Therefore, technically, am i not a Forex investor, since I am buying and selling Forex for trading/investment gains? 

And, if so, don't I still need to separate my gains/losses on stocks vs. currency transactions since each of these is being conducted in different calendar years (i.e., I sold stock in 2019, but would sell INR in 2020)?

[pk]

@ac203  the argument that you are making, while logical , I do not believe will sway the IRS   i.e. they will not  give credence that your INR purchase was  purely and ONLY for  investing in these shares.  However, they will not  argue   if you were to show  that   you used $100 to buy shares    of an Indian entity  ( at that time say INR was  INR 65  per USD ). After a year holding the investment you sold  the  whole lot for  INR 10,000 thus giving you a gain of Rs. 3500 --- 10,000 less  basis of 6500.  Assume you that there was no Indian tax on this .   When  you sold your investment the USD was at Rs. 75 per USD .  This would mean  that for US tax purposes  the  roundtrip  shows you a profit of 10,000 / 75 less $100 i.e. $133 - $100  = $33.  The effects of the loss in currency devaluation is included in the computation of the gain  ( using US$ as the  standard / basis here ).  This is true even if you left the monies in India  and in INR.  However, later when you repatriate the US $ back  the loss at that time  is personal loss and not deductible, the gain  will be .

Generally the rule is ALL income is  taxable , unless specifically excluded by law  and all deductions/losses are disallowed  unless specifically allowed by law.  It is not a bilateral world  but thems the rules based on Congresses' laws enacted.

Hope this answers your querey

Namaste ji

[ac203]

@pk Thank you very much.  Quite helpful, but I am a bit confused now. 

I have taken a TurboTax Live Package, and asked this question to a TurboTax CPA

The CPA initially said I have to take my currency gains/losses at the same time when I sell my stock. 

But after doing some research and consulting with specialists, he came back an offered an alternate view.

His argument was basically I am not just trading in stock, but i am also trading in currency. 

The only question then is whether currency impact should be taken at the same time as stock sale, or could be considered a separate event at the time of INR sale. 

He essentially suggested whichever of the two methods I chose, I should be consistent. 

He said if I chose to treat those as two separate events, I could use one of the two IRS clauses related to FX trading:  Section 988 or Section 1256.  He suggested choosing Section 988 since i have meaningful losses (the stocks I bought as well the currency both have moved unfavorably for me).

He sent me the following links as well: 

https://ttlc.intuit.com/community/taxes/discussion/hello-i-just-open-a-forex-account-and-i-have-gain...

https://www.law.cornell.edu/uscode/text/26/988

I am now confused whether I can separate the two events or not

Please advise @pk 

Namaste Ji!

[pk]

@ac203 , I am sorry I have to disagree with your expert's advice.  

(a)  from your post  you invested in foreign stock, the  buying of foreign currency was incidental to your main objective.  Thus any currency related gain/loss is part and parcel of the round-trip transaction of buying stocks, holding the stock and then disposing of the stocks. Thus it is  once simple transaction ( just a if you bought and sold  stocks in the US market;

(b) the quoted reply from HACKITOFF deals with , and only with , investing in foreign currency as a business and therefore does not apply to you

(c) section 988  again deals with currency and debt instruments  held  for investment -- here is the definition of the  section 988  transaction ( and is not applicable to you, prima facie :(

"(c)Other definitionsFor purposes of this section—

(1)Section 988 transaction

(A)In generalThe 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, or

(ii)

is determined by reference to the value of 1 or more nonfunctional currencies.

(B)Description of transactionsFor 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.

(ii)

Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account.

(iii)

Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument.

The Secretary may prescribe regulations excluding from the application of clause (ii) any class of items the taking into account of which is not necessary to carry out the purposes of this section by reason of the small amounts or short periods involved, or otherwise.

I am at a loss to understand what you are trying to achieve by partitioning  off stocks transaction    and the currency transaction ?  Do not understand why this method  of recognizing loss/gain would give a better outcome than  using the  total transaction ( i.e. one transaction including the effect of currency fluctuation ).

Namaste

[ac203]

Thank you @pk 

Your response makes a lot of sense!

Re your question on why I am trying to separate the two transactions: 

""

I am at a loss to understand what you are trying to achieve by partitioning  off stocks transaction    and the currency transaction ?  Do not understand why this method  of recognizing loss/gain would give a better outcome than  using the  total transaction ( i.e. one transaction including the effect of currency fluctuation ).

""

I sent the monies but didn't use all of the cash to buy equities in one go..

Using your example, I sent $100 at USDINR of 65 to get Rs. 6500, but let's say i bought stock only worth Rs.4000 and that too in multiple transactions over several months after the initial FX transfer. 

During this time INR kept declining (unfavorable) for me

now calculating my purchase price becomes challenge since i have several stocks and multiple transactions in various stock

Essentially if i  convert purchase price in INR to USD as of the purchase date, i lose to capture the loss on devaluation before I actually bought the stock , i.e., while INR was lying in my account and getting devalued. Also I lose the capture the loss on Rs 2500 (6500-4000) which I didn't actually spent on stocks

How do I capture those losses in the stock purchase/sale transaction? 

Therefore, i was trying to treat the part where i sent the monies, kept the funds in account for trading stocks, but then just sold the INR (and never used the funds for stocks) - argument being that would be FX trade (money sent for investing and brought back). But I get your point that is not valid. 

Please advice how would you approach the situation to stock purchase/sale reporting to optimize for whatever the IRS allows 

Thank you very much @pk 

Namaste ji!

[pk]

@ac203 , thank you for explaining the situation -- I understand your predicament.  Need to think through this a little i.e. how to recognize the losses incurred without running afoul of the rules.

In the meantime, it would help to have an idea of the numbers we are talking about --- total Dollars sent out;  exchange rate at the time ;  Rs. invested total ; rough range of  exchange or give me the dates and we can create a blended rate ;  loss on stocks   ;  rough exchnage rate on the way back ; how much did you leave there for future investment etc.

If you are uncomfortable  leaving figures here , you can use PM

will come back by tomorrow sometime ( PDT ).