How to show currency loss in foreign CD due to exchange rate conversion? (2024)

Turbo Tax Experts,

I have replied to multiple posts (post1, post2) on similar topic to get more information on this subject yesterday. I have not received any response yet as it has not been that long. But I think this is a common situation which should be clearly documented on Turbo Tax site to help people address this tax situation properly. Hence I decided to start a new post with all my findings so far and to get confirmation on those findings from the tax experts here.

Here is my tax situation:

I need to show foreign currency loss in the foreign CD and want to know if it should be shown as ordinary loss or capital loss on tax return. I transferred $25K in 2008 to India (in INR currency) and I invested the money in CD which gave good interest for which I paid taxes in US over the years by converting to USD using that year's exchange rate. In 2023, I converted that whole CD amount to USD. When I calculated the cost basis (by including all interests reinvested at different exchange rates), I can see I have a total of $30K loss. Should I show this as ordinary loss or capital loss on my 2023 tax return?

Here are my findings based on various articles:

1. Based on this articlepublication on ruchelaw.com, these should be treated as Section 988 transactions. Page #10 explains this:In general, Section 988 transactions include the following:Any disposition of any nonfunctional currency -For these purposes, nonfunctional currency includes coin andnonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.

2. Section(9)Examplesin thisarticle from Cornell law site(example 1 and 2) clearly explains that one can take losses when the individual actually convert the money from one currency to other. Examples mentions a personal loan but CD is also like a loan to the bank. The first paragraph of same article says something like this which is confusing:

Coordination with section 988(c)(1)(C)(ii).Noexchange gain or lossis recognized with respect to the following transactions -.

(A)Anexchangeof units ofnonfunctional currencyfor different units of the samenonfunctional currency;

(B)The deposit ofnonfunctional currencyin a demand or time deposit or similar instrument (including acertificate of deposit)issuedby abankor otherfinancial institutionif such instrument is denominated in such currency.

ButI think the first paragraph of the article is just saying that one cannot take (unrealized) loss during the transactions such as moving money from one deposit to another in same non-functional currency (all points from A to E specifies almost same type of transfer or maturity of CD etc. ). Individuals can adjust the basis as they are showing the interest every year as income but keeping the money invested in foreign currency till it is fully converted to USD. Once money is converted from non-functional currency (ie foreign currency) to USD, a person can take the loss under section 988 (according to examples under section 9).

3. According to this investopedia article, "foreign currency gain or loss on a 988 transaction istreated as ordinary income or lossunless an election is made to treat it as acapital gainor loss. For instance, if an investor makes an election before the transaction is entered into, they may be able to classify the gain or loss on a specific investment as a capital gain rather than ordinary income". My thoughts on this are: IRS wants us to make the election before we know if we will have gain or loss (currency exchange loss in our case) on this investment since treating "gain" as capital gain will benefit us (due to lower tax rate on capital gain vs ordinary income) while treating "loss" as ordinary loss will benefit us more (as ordinary loss can be fully used to offset ordinary income in a single year as opposed to capital loss which need to be spread across years if it is more than 3K). In my case I have not made any election so by default I should treat my loss as ordinary loss (not capital loss).

I know it is a long post but I wanted to consolidate all information from various posts and articles into a single post so anyone else facing the same situation will find this helpful.

Can the tax experts from TurboTax please review my post and confirm my understanding here? Also confirm if below steps to report this ordinary loss on tax return in Turbo Tax will be correct (I got these steps from similar posts on this site):

1. Go to Less common income
2. Miscellaneous Income
3. Other Reportable Income
4. Enter description(Section 988 Forex Losses) and the loss as a negative amount

I will appreciate it if you can confirm soon as I need to submit my taxes in couple of days.

Thank you for your help!

MS

a week ago