Where do I report foreign interest income and losses?

[amitmendiratta1]

I had money invested overseas and I was paying taxes on the interest income for past several year. The foreign bank did not issue a 1099 but I created a pseudo 1099 for declaring the interest income and foreign taxes paid. Now I repatriated the money back to US but my net principal is much lower due to increased value of US dollar. How do I report these losses on my tax return.

[pk]

Unless you were in the business of forex trading, there is no place to report this loss  ( or gain ).  Sorry.

If my memory serves me right, IRS Reg 867 deals with the effects of currency exchange fluctuation/ drift for US businesses with foreign branches/ units of operation and even there the repatriated amounts are devoid of currency effects ( i.e. losses are realized but not recognized). Sorry -- that is one of the risks of dealing with a currency other than US functional currency when filing US returns

[amitmendiratta1]

Your answer is not at all accurate. Code 988 deals with gains/losses related to non functional currency. <a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/988">https://www.law.cornell.edu/uscode/text/26/988</a>. I need to find out how to report these within Turbo Tax when the money was invested in overseas fixed deposits and I have reported and paid taxes on interest earned in the functional currency (USD) over the years but now I repatriated the funds back to US and need to recover the losses incurred when converting the amount from non functional currency to functional currency.

[pk]

I may have misquoted the reg # but my conclusions are accurate. Perhaps you need to consult with a tax professional  familar with this area ( IRS has a directory of registered tax professionals by zip code ).  Good Luck

[jianpingsong]

search "Should I record a loss on a certificate of deposit at a foreign bank denominated in foreign currency due to the fact that the CD matured and the exchange rate changed?" in inline help of turbo. it gives you completely different answer!

[olgaisht]

Should I record a loss on a certificate of deposit at a foreign bank denominated in foreign currency

[pk]

unless you are in the business of forex , losses due to exchange fluctuation is only deductible as "casualty loss" when itemized deduction is used with some deductions under misc. deductions

[deepsom]

Hello Amit,

I am exactly in the same boat - were you able to find a way to report the loss in turbotax?

Deepak

[Anonymous]

here a link to section 988.

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

an important part of 988 is subsection e

(e)Application to individuals
(1)In general
The preceding provisions of this section shall not apply to any section 988 transaction entered into by an individual which is a personal transaction.

(2)Exclusion for certain personal transactions If—
(A)nonfunctional currency is disposed of by an individual in any transaction, and
(B)such transaction is a personal transaction,
no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200.
(3)Personal transactions

For purposes of this subsection, the term “personal transaction” means any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of—
(A)section 162 (other than traveling expenses described in subsection (a)(2) thereof), or
(B)section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).

sec 162 trade or business expenses

sec 212 expenses for the production of income

however, here's a link to reg 1.988-1

https://www.law.cornell.edu/cfr/text/26/1.988-1

take a look a 1.988-1(a)(6) examples 4, 8 and 9

4 and 8 are clearly stated as 988 transactions, 9 is not

988(e)  would suggest that a personal transaction is one that is neither investment nor business related

for example you convert US $'s to pesos for a trip to Mexico.  When you return you convert the remaining pesos back into US $ getting more or less than the original cost in US $'s - ie a personal transaction subject to 988(e).  Section 988 transaction gains or losses are ordinary income reported on line 8 of Schedule 1.  Section 988(a)(1)(A)

[DIY 1]

Hello Anonymous,

Your explanation was informative. Can we conclude that losses occurring from foreign currency devaluation for individuals who sent funds  to a foreign bank savings account/CD which gives an annual interest (3-4)%  (taxes paid on interest earned all these years) can be  applied once the funds are converted back into USD years later?

Funds originally transferred for saving and investment purpose many years ago and not for travel /vacation purpose

[ay66026]

What is the final verdict on this? @pk says the loss is not reportable yet @amitmendiratta1 and others seem to think the loss is reportable. If the loss reportable where do you report it?

[ThomasM125]

Losses on capital (personal) assets are not deductible, but this would appear to be an investment. While it is true section 988 does not apply to "personal transactions", since the funds were invested and earning interest, they are clearly more of an investment than a capital asset, so the loss would seem to be deductible.

The loss would not be a casualty loss, as that would entail it being sudden, unexpected or unusual.

According to section 988, the loss would be treated as an offset to ordinary income, since I assume an election was not made at the time the funds were invested to treat it as capital gain income. As such, you would report it in TurboTax by clicking on the following tabs:

1. Income and Expenses  
2. Add more income
3. Less common income 
4. Miscellaneous Income
5. Other Reportable Income
6. Enter description (FOREX losses) and the loss as a negative amount

[ay66026]

Thanks so much for the very clear answer. It boils down to whether the transaction is personal or investment. Would you be able to clarify whether the below examples are personal or investment?

withdraw rupees from the foreign acct to purchase rental property (paid in rupees)

withdraw rupees from the foreign acct to purchase residence for himself to live (paid in rupees)

convert rupees into USD and open a interest bearing USD acct

[pk]

@ThomasM125  while I generally agree with your observations of section 988 applicability, a savings account / CD is a personal asset -- it is not generally given capital treatment, never mind the  return rate.  The 1098-INT regime does not distinguish between  savings interest  earned in the USA vs abroad.  Therefore currency loss  cannot be claimed as capital loss.  It may qualify for casualty loss treatment if  itemized  deduction is used.  Also as an individual  one cannot use the operating currency rules/benefits either.  That is my position .

[pk]

@ay66026  if you took  UKPounds 400,000 , deposited in an account in India ( now it is INR 32,000,000  at INR80 per UKL ), then use  INR30,000,000 to buy and furnish a house, then you let the INR 2,000,000 sit in the  Indian bank for two years at which time it is now  say  INR 2,500,000 for arguments sake.  You then transfer this  INR2,500,000 to  your US bank the following is what you have to recognize ( assuming that the UK bank amount had already been taxed  by UK and you were a UK resident at the time and not US resident--->

you would have to recognize the interest earned as part of your  world income ( USA resident ), converted to US$ at the published exchange rate when the interest was made available to you.

The use of the property a the time  ( i.e. during the tax year for US purposes ) determines  the taxability i.e. if it your  home  and not rented out -- it is treated as a second home  and  hence mortgage interest etc are deductible to you.  If it is used temporarily used as rental property ( and for profit ) then the income must be recognized, expenses allowed and depreciation claimed on schedule-E.    

Does this generally point you in the right direction or do you need more on this  -- in which case you have provide more details on the transactions already completed and  your near future plans, please