Section 988 - Certificate of deposit - loss of principal and interest due to devaluation of currency

Forum|Forum|3 years ago
March 17, 2023
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A few years back, I invested in CDs overseas, in foreign currency and reported interest income, paid taxes annually. However starting last year I have started liquidating the CDs.. but when it coverts back to USD, the amount results in loss of principal and by the time i am done, likely going to lose all the interest on which I have paid income tax on. Can I report this loss under 'other income' schedule 1 line 8z as a negative number? (as per the discussion in the link below). Wanted to confirm if Certificates of deposits qualify under Sec 988

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/how-do-i-report-foreign-exchange-losses/00/1023774

Secondly, does NJ recognize this loss and if so, where does this go on the NJ return? any negative number returns an error in Turbotax.

Best answer by Mike9241

nased on iRS regs 1.988-2

sold for E 950 @$.65

Under the general rules, T’s exchange loss is $50 ((€1,000 × $0.70) purchase price in US $ =$700 less the principal amount at the spot rate for date of sale (€1,000 × $0.65)). However, the overall economic loss on the sale is $82.50—the amount realized (€950 × $0.65, or $617.50) less the bond’s adjusted basis (€1,000 × $0.70, or $700). Thus, under the netting rule, T’s $82.50 overall economic loss consists of $50 ordinary exchange loss and a $32.50 market loss, which is capital in character; see Regs. Sec. 1.988-2(b)(9), Example (5)(ii).

now say sold for 950@$.40=$380, exchange loss $700 less 1000 *.4 = $400 exchange loss $300

economic loss $700-380 = $420 ordinary exchange loss 300 market/capital loss 120

hbl3973

Employee

AC125,

CDs are investments and in your situation I would follow the rules that can be used for bonds bought at a premium. Report the CDs under the stocks and bonds area as either short term or long term investments where both the proceeds and the basis were not reported to the IRS. (These are coded C and F on form 8949.) Your cost basis is what you invested in $USD and your proceeds are what you received at maturity converted to $USD.

AC125Author

Thanks for the response. Like you said, typically capital assets like property or stocks will go through schedule D - capital gain (loss) via 8949. However, given that these losses on the CDs are exclusively due to foreign currency devaluation, shouldn’t the reporting be on schedule 1 under ordinary income gain (loss) as opposed to capital gain loss? (As per section 988)?

Mike9241Answer

nased on iRS regs 1.988-2

sold for E 950 @$.65

now say sold for 950@$.40=$380, exchange loss $700 less 1000 *.4 = $400 exchange loss $300

economic loss $700-380 = $420 ordinary exchange loss 300 market/capital loss 120

AC125Author

Basically what you’re saying as per the example that the market loss is capital gains (loss) and currency change is ordinary gain (loss).
In my example, it’s a CD. Hence, where there’s income (interest paid) as ordinary income which I have reported annually and paid taxes. And now I have currency loss, which should be ordinary loss as well. Example: $1000 invested in CD in foreign currency. Say $50 equivalent interest earned in year 1. Total value after growth in USD equivalent (held in foreign currency) = $1050. When I close the CD, I got back only $950 due to currency loss. So $100 should be deductible on schedule 1 - line 8z as a negative number -$100. Correct?