Foreign Fixed Deposit interest

[gohawksseattle]

I have accrued some interest on my foreign bank fixed deposit (FD). This is a savings investment vehicle like a CD. Want to understand how to report interest for IRS this year. As an example, if I invested $100 a year back, earned $20 interest but let's say due to currency exchange losses my $100 principal is now effectively $90. I have 2 options, which one should I do:

1. Report interest of $10 as that is effectively what I made as interest after addressing the currency devaluation.

2. Report interest of $20 but then report a currency loss of $10 in Schedule D (as it is an investment not a personal thing).

What is the right answer here?

Thanks in advance for the help!

[Anonymous_]

@pk may be able to help.

[pk]

@gohawksseattle ,

(a) what country are your CD/ FD held in ?  And is it  in local currency  or in US$ ?

(b) Are you a US person ( citizen / Green Card / Tax Resident )

(c) Was this CD/FD started ( and with local currency ) before you entered the USA ?

Generally as a US person , unless you are  a currency dealer / FX investor, your operating currency is US$ and therefore exchange losses to the principle are ignored , while gains are taxed.  But here agian depending on the facts and circumstances and treaty conditions things may change.

I will come back once I hear from you

pk

[gohawksseattle]

Thanks Pk. Responses to your questions 

a) India. In local currency 

b) Green Card 

c) FD started after I was in US

[gohawksseattle]

@pk for attention. Thank you.

[gohawksseattle]

Also in the statement 'losses are ignored but gains are taxed', in my example above, should I then report $10 only as that is effectively the gain after currency devaluation?

[pk]

@gohawksseattle , what I meant is  ( and this generally in concert with  US-India Tax treaty Article 11  and IRS ), if you invest US$1000  ( Rs/- 9000 ) in a FD scheme  for three years  and it pays  interest  ( credits your account) Rs/- 1500  ( US$17 ) in  the first year ---- then for  for US purposes, you  recognize interest income of US$17  for that tax year. India may also  tax you on the interest  ( say Rs/-150) which you can claim as foreign taxes paid  and take credit  ( use the safeharbor  amount of  US$300 per filer or if more than that amount decide whether to limit your tax recognition to safe harbor amount or file a form 1666 when the credit limitations comes into play ).

When your term of the FD is up and get your  principle back then and only then  you may have a currency loss to deal with.  If this was a business  ( forward contracts or other contracts  ) then you could claim loss.  Even Casualty loss ( if you itemize )  is not possible  because you should have known the currency risks  in these circumstances.  If however something unexpected happens and the currency suffers  major , major loss ( like default  for example ) then yes you should be able to claim  this as an act of God / unforeseen and therefore casualty loss  (with the floor -- 2%?) be allowed.

I don't know if this is what you expected but ....

Is there more I can do for you ?

Namaste ji

pk

[gohawksseattle]

Thanks @pk All makes sense largely

Except one thing that my effective interest (in my example) is not $20 but $10 and so, I should really be paying taxes on that interest I made. Correct? Why would I pay taxes on $20 interest when I did not really make that gain on my principle?

[gohawksseattle]

Sorry, @pk or anyone else, can you pls help me with what should I use for interest to report (in my example)?

[pk]

@gohawksseattle , sorry, I don't know how to help you any more  ---- as I said an interest income stands on its own and taxed as such ( for US purposes ) recognized when made available to you ( constructive receipt ) -- it has nothing to with erosion of principle  due to currency fluctuation.  Perhaps one of my colleagues  will chime in here --?

[Juancar]

@pk 

Hi. I have several CDs in a foreign institution in Spain. They all started in January 2024 and they all spanned into 2025 (January 2025 and July 2025). Most of the CDs had a maturity of 12 months, but a couple of them have a maturity of 18 months. They all only pay the interests at their maturity. I have checked with the bank and said I will not receive the equivalent of a 1099-INT until next year because in the eyes of the Spanish legislation that income belongs to the 2025 fiscal year.

I have been asking some people and they are all giving me different answers. I have read some parts of publication 550, particularly pgs 7 and 20 and I am still confused.

When do I need to report that money here in the US?

Is it the same rule here in the US and report all income in 2026?

Does the fact that the CDs span over two years mean that I would have to report those CDs in two fiscal years?  Is there a difference if the CD is 12 months or 18 months? 

This is the info form pub 550 

Page 7 - Certificates of deposit and other deferred interest accounts.

If you buy a certificate of deposit or open a deferred interest account, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID), later.

Pg 20 -  Certificates of Deposit (CDs)

A CD is a debt instrument.

If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID.

Thank you in advance for your help.

@pk 

[pk]

@Juancar  having read through your post as also the ref'd material, 

(a) reporting / recognition of  earned interest from CDs etc.  rules are the same whether the  financial entity is domestic or foreign.  The only difference is that in case of domestic institutions you  receive a 1099-INT while in case of foreign entities there may be  no such  supporting documentation.

 (b) the whole recognition  dilemma is because of the concept of constructive receipt .  My understanding of this is because a financial  institution  generally will recognize the  customer's earning as debt / expense  at the end of the year ( financial or tax ).  Thus whether you actually can get the "earned  interest" in your hands or not , the entity's books will reflect this as a debt ( accounts payable ) and therefore its taxable income.    This means that  you as the "purported recipient/beneficiary " must also recognize the income and be taxed.

Thus , for example if you  start a CD with a maturity of 12 months ( and per contract  interest  paid quarterly )   on July 1st of 2023,  by the end of 2023, you and the bank will recognize  2 quarter's worth  of interest earned  by Dec 31st of 2023.  So the bank should give you a 1099-INT of 2 Qs worth of earned interest for 2023, even though the monies are actually not available to be withdrawn  for another six months.  This gets even more contorted if you now break the CD and  close the account in say Jan of 2024 --- the penalty may actually reduce your capital.

 This as I understand how things are supposed to work, to keep both the financial institution's  books/taxes  and yours in sync  from IRS / taxing  view.   Since IRS really does not recognize / allow for  different  taxing schemes  for other countries, it  uses  US rules / viewpoint  for all  income sources whether domestic or foreign.

Does this make sense ?

pk

[Juancar]

Thank you Pk for your response. However, I am not sure I understood your explanation.

I never received any money, zero. In the case of the 12 month CDs, the bank paid me a lump sum in January, which is when the CDs matured and interests were paid. As for the 18 month CDs, so far I have not received any money. All interest will be paid in July at their maturity.

Please note that none of the CDs paid quarterly, or semi-annually interests. Just nothing. 

If I understood your explanation, for the 18 month CDs I should apportion part of the total interests that will be paid in July 2025 to the 2024 taxes (from January to Dec 2024). It is like a phantom interest. Then, next year I should report the rest, from January 2025 until July 2025.

Did I understand correctly?

How about the 1 year CDS?  They overlapped over two fiscal years? (from mid January 2024 until mid January 2025). Should I also apportion some of that interests or in this case, because they were short time CDs, report all that income with my 2025 taxes?

I truly appreciate your time and patience.

@pk 

[pk]

@Juancar , while I understand the underlying logic  behind requiring recognition  of "constructive receipt " for domestic  entities -- i.e.  you recognize the interest earnings   ( quarterly or whatever the contract calls out  as  "update/ increase period " ) even though you have no right to it without breaking the contract and therefore paying a penalty, my struggle is with the  undue & associated  penalty  that you incur because of foreign tax ---  e.g.  say the interest  at  4% annual , is  deposited/ recorded  quarterly.  Thus you  using the  "constructive receipt " recognize the  gain and are taxed  thereon.  But the foreign govt does not follow the same rule and recognizes the gain only once the three year term is complete.  So you then have  US taxes  on an yearly basis  but with no  Foreign tax credit . Then at the end of the three years you have a large Foreign tax  ,  but very little  US tax   ( because  most of the interest earnings have already been taxed by the US already ).  This means your foreign tax credit is pretty small -- credit is the lesser of  Foreign taxes paid  and US tax on the same income.

IMHO , one should ignore  the crediting of the interest till it is actually available and therefore the US  tax is on the same income as the foreign  taxed income.

I have no statute to support my position and have no case law to back it up.  But it seems logical

pk

[Juancar]

No foreign taxes will be withheld.  The only taxes will be with the US.

In plain English. When do I need to report those interests? All in 2025? Only the 12 month CD should be reported in 2025? The 18 month CD should be apportioned (2024 and 2025). Or even the 12 month CD should be apportioned because they overlap two fiscal years? 

What is your opinion?

@pk 

Thank you for your help with this matter