Section 988 - Foreign Certificate of deposit - When to report fluctuations in currencies

[Jo62]

Hi,

I'm trying to determine if I need to report fluctuations of currencies on a Canadian certificate of deposit (GICs) that expired in 2022. I've gotten conflicting info on this.  

Context: US resident reporting to IRS. Let's say I bought a certificate with Canadian dollars in 2021 at $1000 CAD which was equivalent to $800 USD. The money was always in Canada, so I didn't exchange any USD to get them. A year later, the certificate expires and the $1000 CAD is now worth $700 USD. I reinvested the $1000 CAD in another 1 y CD, so I never converted the CAD to USD. 

Questions: 

- Are foreign CDs covered by section 988 (my guess is yes)

- Does section 988 applies to individuals (my guess is yes)

- Do we need to report the currency fluctuation between purchase price and expiration price as gain/loss when the certificate expires (even if reinvested)?  

- Or, do we report the gain/loss only when I sell  the CAD back to USD? 

- Any difference in tax treatment at the state level if living in California?

Footnotes:

If I need to report, I know that it would go into Other income etc. as covered in other posts. 

I received a NR4 statement for the interest and I know what to do with that (convert in USD and report as interest, file foreign accounts and FBAR). 

cc  Mike9241, DaveF1006 

due to excellent answers on similar posts

[Mike9241]

gain loss recognized on maturity.  

you may want to revoew reg 1.988-2

https://www.law.cornell.edu/cfr/text/26/1.988-2 

(a) (iii) example 1 if interest is added to principal 

[Jo62]

Thanks @Mike9241 

The reference makes it sounds like fluctuations of currencies for Certificates of deposits are not taxable events: 

§ 1.988-2 Recognition and computation of exchange gain or loss.

(a) Disposition of nonfunctional currency -

(1) Recognition of exchange gain or loss -

[...]

(iii) Coordination with section 988(c)(1)(C)(ii). No exchange gain or loss is recognized with respect to the following transactions -
[...]

(B) The deposit of nonfunctional currency in a demand or time deposit or similar instrument (including a certificate of deposit) issued by a bank or other financial institution if such instrument is denominated in such currency;

(C) The withdrawal of nonfunctional currency from a demand or time deposit or similar instrument issued by a bank or other financial institution if such instrument is denominated in such currency;

Am I reading this wrong or missing something? 

[DaveF1006 · Accepted solution]

Actually what it says in this post is:

Coordination with section 988(c)(1)(C)(ii). No exchange gain or loss is recognized with respect to the following transactions -.

(A) An exchange of units of nonfunctional currency for different units of the same nonfunctional currency;

(B) The deposit of nonfunctional currency in a demand or time deposit or similar instrument (including a certificate of deposit) issued by a bank or other financial institution if such instrument is denominated in such currency.

Thus gains or losses are not recognized in Section 988 transactions.

@Jo62 

[Jo62]

Thanks for confirming

[Jo62]

Also the reference on how to handle interest was nice, thanks