Forex losses on 10-year CDs - report as ordinary loss on Section 1, line 8 of 1040 or as losses on Schedule D?

Forum|Forum|3 years ago
March 27, 2023
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Hi,

I was looking for clarity on how to recognize losses on a 10-year CD that I had invested in a foreign savings account. The CD was intended to be an investment - no personal transactions have been conducted in the savings account . I paid taxes on accrued interest on the CDs via Schedule B every year.

Say I put in $100 at time 0, and received interest of $8, 9, 10, 11, 12, 13, 14, 15, 16, 17 (totaling $125) in yrs 1..10- so my cost basis is $225. Upon repatriation, because of adverse FX moves, I received , say only $150.

1) Can I take $75 ($150-225) as an ordinary loss as per Section 988? In my view, there is no capital gain/loss involved as the CD par amount was effectively 100 both at time zero and 100 at maturity - so the entire loss is because of forex moves.

2) Do I report this in Other income, Form 1, line 8 in Turbotax? For description, do I just say something like "Foreign exchange losses on 10-year CDs" or need to enter something else?

3) Do I need to attach any other documentation to my return?

Some experts have said that instead of taking 988 losses, I need to use schedule D. Others have said that FX losses on CDs cannot be taken at all because they are personal transactions, not investments.

Even the reply from the FX experts on this forum seems to be different (For instance, see the response https://ttlc.intuit.com/community/taxes/discussion/foreign-currency-loss-section-988/00/2527216 by Mike9241 vs more recently under https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-section-988-certificate-of-deposit-loss-of-principal-and-interest-due-to-devaluation-of-currency/01/2961845#M101188 by DaveF1006)

Mike/Dave, is it possible to give your latest thoughts, and reconcile your views on my query? Thanks for the guidance

DaveF1006

No it is not possible to claim a 988 loss on a foreign CD account. 988 losses are related to currency traders trading on the Forex exchange and not from losses from foreign bank accounts.

Only losses that can be claimed as capital losses claimed on Schedule D are from the sales of stocks and bonds but not from interest or dividends. This is true for both domestic and foreign accounts.

@rset

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rsetAuthor

@DaveF1006, Thank you for your response. Just for clarification, my situation seems to what @@@AC125 raised a few weeks ago (https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-section-988-certificate-of-deposit-loss-of-principal-and-interest-due-to-devaluation-of-currency/01/2961845#M101188).

However, your guidance for me seems to be different vs. the query he raised. Am I understanding this correctly, or is there a difference in my situation vs his that has led to a different interpretation on your part? Thanks for any clarification.

DaveF1006

Please read the following IRS reference regarding the definition of a Section 988 transaction. Section 988 transactions include debt instruments, payables, receivables, forward contracts, futures contracts, options or similar instruments denominated in any nonfunctional currency asset.

CD's or other assets are not specifically mentioned in this publication so I would err on the side of caution in trying to declare this as an ordinary loss. i suppose you can make a case for yourself as Mike9241 mentions if the loss was due to currency devaluation but if it was due to declining interest rates, then this would not be a 988 loss.

Use your best discretion. Interest and Dividend losses are not allowable for US tax purposes and should not be allowable for foreign as well. This is the position that I take although others may take a contrary view.

@rset

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