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 $10 in Schedule D (as it is an investment not a personal thing).
What is the right answer here?
Thanks in advance for the help!
(a) what country are your CD/ FD held in ? And is it in local currency or in US$ ?
(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
Thanks Pk. Responses to your questions
a) India. In local currency
b) Green Card
c) FD started after I was in US
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?
@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
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?
Sorry, @pk or anyone else, can you pls help me with what should I use for interest to report (in my example)?
@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 --?
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
@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
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.
@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
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?
Thank you for your help with this matter
@Juancar , having gone over my replies on your situatiuon , I just want to clarify the following:
(a) if there is no foreign tax credit/deduction angle , then ignore my last para in my most recent reply.
(b) what I was trying to get at is that the concept of "constructive receipt" is applicable for US taxes . That is to say , if your CD agreement with the bank says that "interest would be deposited X times a year", then even though the actual available monies are not available to you ( without penalty ), it is your on the banks books. Thus you need to recognize this as income . There could be cases ( for example a six month CD ) where the Financial institution says that interest will be "credited " to your account ONLY at the end of the CD agreement period ( often called TERM ) , then there is no "constructive receipt" till the end of the contract.
This constructive receipt persists even when the CD contract spans over the end of the year -- Say October of one year to March of the next year. In such a case , if the interest credition is every quarter, then you recognize the interest earned in Dec of one year for that year's return and the March interest credition in the following year return.
BWT, why isn't the interest earning no taxed in the source country ? Or is that the source country does no have a tax treaty with US ?
Does this make sense or am I confusing you more ?
Thank you pk for your response
1.- No interest is withheld because I do not live in that country and I signed a document saying so. It means, that I only have to report it here in the US. I assume that because of FATCA that information will be transmitted to the IRS anyway.
2.-
There could be cases where the Financial institution says that interest will be "credited " to your account ONLY at the end of the CD agreement period ( often called TERM ) , then there is no "constructive receipt" till the end of the contract. Yes, that is exactly my case in all CDs (the 12 months and the 18 month CDs) only paid the interests at the end.
So, should I report the interests of those CDs this year or the following? Should I report a portion for the 2024 and the remaining in 2025?
Somebody else published a similar question a year ago and the person who answered included this link in the response.
https://www.goldinglawyers.com/how-does-the-irs-tax-foreign-certificate-of-deposit-interest/#:~:text...
How do I proceed?
@pk
@Juancar ,
the ref article is saying the same thing -- constructive receipt. IRC Sections 861, 1272, 1273, 1274 and 1275 in looking at CDs , especially foreign ones as OID ( Original Issue Discount ) equivalent, extends this "Constructive Receipt" further and actually likes a CD to a loan/ debt instrument with present value ( purchase price ) being a discounted future value i.e. an OID . In this interpretation, the incremental value ( value at redemption LESS original purchase price ) divided by the length of the contract is per day earning that needs to be recognized as income.
Thus it implies that you need to recognize and pay tax on interest earned during the tax year. Thus for your CDs that span over the year end , you recognize the earnings for the year ( allocated based on the interest rate times the number of days under contract in the current tax year).
Does this make sense ?
But how about Publication 550? It makes a difference between short term CDs (1 year or less) and long term CDs (more than 1 year).
Let me copy and paste again what it says:
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.
Applying those rules, I should only apportion the 18-month CD because the other ones are short term (1 year).
@Juancar , having gone through all that you pointed out ( refs) and the statutes I mentioned earlier, think your best bet is to recognize the incomes and pay the taxes as you see it ---- the amounts accrued or credited to your account by the last day of 2024 -- for 2024 tax year. Thus for an 18 month CD opened in Say June of 2024, would require you to recognize six months worth of interest by 12/31/2024. You can use daily, monthly or quarterly methods, just use the same discipline for all the CDs. Keep all your documentation ( on how you came to the earned interest figures and exchange rates involved ), just in case there is a challenge ( very unlikely ).
Also note that any/all bank accounts or CDs etc. come under FBAR ( form 114 at FinCen.gov and on-line only ) and FATCA ( form 8938 along with your return ).
Sorry to took so long to help -- forgive
pk