Where do I report foreign interest income and losses?

[ay66026]

Unfortunately the confusion exists right at the center of the question. In case of a savings acct, CD type investment you are saying losses on principal due to depreciating currency is not deductible (because you consider savings acct as personal asset so sec988 doesn't apply). According to @ThomasM125 savings acct is for the purpose of income generation (sec212 exceptions to personal asset applies) so the depreciation is ordinary loss.

The strange thing is that savings acct/CD/term deposits are very popular instruments, not some exotic investment; so I am surprised that we dont have a agreed upon answer. Also, logically, if I make 20% interest in a rupee acct while rupee losses 30% against USD due to depreciation, the whole investment is at 10% loss, how can IRS expect to tax 20% income while ignoring the overall loss ? 

[ThomasM125]

In large part, it comes down to the intent of the individual. If he could demonstrate that he held the funds overseas as an investment, with the believe that it would appreciate in value because of currency fluctuations, then he would have a valid argument that he owned a traditional investment and lost money when he disposed of it. If this is true, then one would think a loss deduction would be allowable.

Since it involves nonfunctional currency, then code 988 would apply, that is why I believe it would be an ordinary loss.

If he simply held it in a bank account without regard to the gain or loss on currency fluctuations, then it would be a personal asset and the gain would not be deductible. So, to sustain an audit on the issue, he would need to be able to demonstrate a traditional investment motive for keeping the funds in the foreign bank. 

So, @ay66026 has a valid point when he mentions that a CD can function as a traditional investment, complete with gains or losses on disposition. 

[pk]

@ThomasM125 , I recognize  that it is the intention that is important however, unless there is contemporaneous  documents / proof to show that the intention here was indeed  to use this bank account as investment , this  will not stand an audit.    During my professional days , if I had such a case I would have given the client the facts as they stand but would not have suggested  treating this as capital/investment asset ( absent any documentary or other evidence  to the contrary) mostly because under the IRS rules ( of advice and assertion and  subscribing to section 230 ) there would be  less  than likely chance of sustaining an audit.  I still believe this to be the case but of course it is the poster's choice as to the treatment of the  gains/losses.

A second point  that poster talks about is  being taxed on 20% local currency gain and 10% loss on exchange  back to dollars  and there fore it is unfair ----  since   interests earned  are recognized in US$ at the time of earnings, I see really no loss -- just less interest earnings and therefore  taxes ONLY on the US$ based earnings.   Also if there are fees involved in the conversion these are costs against the earnings -- that also  should ameliorate the bite  -- this is of course assuming non-capital / investment  type of account.

I rest -- enough has been covered in this discussion

[DIY 1]

Thanks for everyone's inputs. Both @ThomasM125 and  @pk have valid points. It seems that if someone can prove the intent then things are less frothy

What do you think would be contemporaneous  documents / proof to show that the intention here was indeed  to use this bank account as investment? 

I mean are there any specific documents IRS is looking for? 

[AmyC]

Foreign source income is covered under investments in Publication 550 (2019), Investment Income and Expenses ...

If you show the money was sitting there to earn income, you should be fine. A checking account full of transactions would not be a good investment account while a savings account might be. The IRS pub lists all the investments covered.

@DIY 1

[satishcsura]

Hello, 

        We need to understand capital gain/losses  due to exchange rate need to be recorded in Schedule D always when we have invested something in foreign nations. So In Foreign FD account, take a note of the date of entry of principal amount & currency rate during that time and date of exit of principal amount & currency rate during that time, then at the time of closing the account record the capital gain/loss (principal amount here) in schedule D. 

 I have the same question today and asked help of real financial consultant who understands the tax book in fair manner. This usually are one who worked in IRS past.  Well someone said you are at loss at currency exchange risk. This cannot and should not be the case.  I see most of tax consultants don't have clue how to handle your question and following the book blindly. They don't realize they are giving loss to either US Govt or their customer.  Hmm . Get appropriate tax consultant.

I think you already might have filed taxes for year 2019 but if you didn't do this process you should amend you taxes this year. Best of Luck

Satish

[ReneeM7122]

Use Form 6781 to report losses on currency exchanges.

OVERVIEW

Section 1256 contracts and straddles are named for the section of the Internal Revenue Code that explains how investments like futures and options must be reported and taxed. Under the Code, Section 1256 investments are assigned a fair market value at the end of the year. If you have these types of investments, you'll report them to the IRS on Form 6781 every year, regardless of whether you actually sell them.

Securities regarded as Section 1256 investments include:

• non-equity options
• foreign currency contracts
• regulated futures contracts
• dealer equity options
• dealer securities futures contracts

If you buy both a call option and a put option for the same investment security at the same time, your investment is known as a straddle. With a straddle, you typically only make money when there’s a significant price change in the underlying investment. One of the key characteristics of Section 1256 investments is that they use leverage, meaning that an investor only has to put up a small amount of money to control a larger valued investment.

For example, with a futures contract, an investor could control $100,000 of a commodity, such as silver, with only a $5,000 deposit, known as a margin deposit. For this reason, investments that fall under Section 1256 can result in huge gains or losses.

Gains and losses on Section 1256 investments and straddles

Under normal circumstances, if you buy a stock at $100 per share and hold it for 10 years, you don't have to report any gains or losses until you sell it. With Section 1256 investments, IRS requires you to report actual or would-be gains and losses through the end of the year on Form 6781. The basics of Section 1256 investments are as follows:

• You report gains and losses—as a result of an actual sale or the fair market value—through December 31 of each year.
• You complete Form 6781 even if you keep the investments.
• The process of assigning fair market value to investments you continue to hold, and don’t sell, is called “mark to market.”
• For tax purposes, every Section 1256 gain or loss is treated as being 60% long term and 40% short term, no matter how long you own it.
  • Long-term gains, defined as those held for longer than one year, generally have more advantageous tax characteristics than short-term gains, which are held for one year or less.

Using Form 6781

Completing the form is similar to reporting any type of investment. Here’s the breakdown:

• Part I: Report your Section 1256 investment gains and losses at either the actual price at which you sold these investments or the "mark-to-market" price established on December 31.
• Part II: Report the gains and losses on your straddles, with losses reported in Section A and gains calculated in Section B.
• Part III: Meant for any unrecognized gains you have on positions held at the end of the tax year, but you only have to complete it if you have a recognized loss on a position.

@satishcsura

[satishcsura]

Thanks. Good information  @ReneeM7122 . So I believe this reported losses will be added to my income and become exempt from taxes .. I will need find out new tax consultant this year, who is aware of all these forms. Thanks again!!

[ReneeM7122]

No, the losses aren't added to your income.  They are deducted from your taxable income.  There is a difference - adding income would be counter-intuitive because any added income would be subject to tax.  Deducting from your taxable income literally takes it away.

Regarding a new tax consultant this year, TurboTax is now offering Full Service.  Here is the link:

https://turbotax.intuit.com/personal-taxes/online/live/

[satishcsura]

According to some, Form 6781 is applied if engaged in commerce or trade. In case of bank deposits, it looks like Schedule D is the form.  But whatever the case I am happy to know that we have a way to deal with currency exchange losses in fixed deposits. 

I will browse for the tax consultants from the link you have sent. 

Thanks

Satish

[pk]

@satishcsura  very happy to see that you have found your answer.  However I would like to  point out that :

(a) there   was never a statement / sentiment that one cannot  recognize  loss due to currency exchange;

(b) to understand the  tax laws  and the application thereof , one only needs to study the subject ---  there is  absolutely  no need to have been employed by the IRS

(c) most of the volunteers in the community are  either  current or retired  tax professionals and "experts " employed by TurboTax are  mostly current tax professionals.

(d) Whether a loss is allowable or not depends on the facts and circumstances --- is it an activity  for profit or a personal. Generally while personal losses are  NOT deductible/recognizable, business losses are . To wit,  foreign exchange losses  of a business that is investing in foreign countries/ stocks etc. is indeed  allowed  by the mere fact of using US$ as the operating currency,   a business that invests in foreign exchange  contracts and straddles is allowed to recognize  losses due to  exchange.  However  a US person holding foreign currency in a savings account  and repatriating the  amount  may or may not be able to  recognize the loss --- have to prove the intent ( that this was  investment and not personal use ).

I rest

[satishcsura]

@pk 

It is fixed deposit account that cannot be withdrawn for certain period. Not just a savings account. Yes Bank can provide letter that this account is for investment purpose. So I should be good I guess.

[pk]

@satishcsura ,  that may be a reasonable  stance to take.   You will need theses back-up if and only if the IRS chooses  to ask for proof.

Is there more I can do for you ?

[satishcsura]

Thanks for the reply. What form you want me use ? 6781 or schedule D?

Thanks

Satish

[ThomasM125]

Form 6781 is used for section 1256 contracts under the mark-to-market rules, and also for section 1092 contracts which have to do with straddle positions.

Since you are dealing with bank deposits, it would seem that Schedule D would be more appropriate.