How does IRS apply tax on profit when the foreign currency is involved?

[Hexensage]

Hi all,

let's assume an American citizen (and tax resident) has bought the real estate in Thailand in 2015 for THB 300 000, which was US$ 100 000 in accordance with the THB/US$ exchange rate(*) for the date the deal was closed. In 2019 he sells this real estate for THB 350 000, which was US$ 90 000 based on the exchange rate(**) for the date of the deal.

(*) - sample rate THB/US$ = 3/1
(**) - sample rate THB/US$ = ~3.89/1

So on the one hand the real estate was sold at a higher price in THB (= profit), but on the other - at a lower price in US$ (= loss). Which calculation algorithm shall IRS apply?

Will it be (THB 350 000 / 3.89) - (THB 300 000 / 3) = US$90 000 - US$ 100 000 = - US$10 000 (so no tax on profit to be applied)?
Or will it rather be (THB 350 000 - THB 300 000) / 3.89*) = ~ US$12 853 (which is subject for taxation)?

*) - THB/US$ rate for the date the profit was gained.

Thank you!

 

[FlyingRon]

For most things (there are some odd stuff for section 987 units), the IRS standard is to use the current rate that is most indicative of the transaction as it takes place. So essentially you bought in 2015 for $100,000 and sold in 2019 for $90,000. This is capital loss (barring other adjustments) of $10,000.

If you don't know the actual "on the day of the transaction" rate, the IRS maintains average rates for the year going back a while which is the next best thing.

 

[Taxing Matters]

I suspect that you are the one who asked this same question on another site using the example of Russian Rubles rather than Thai Baht as the questions are so similar that I don't think it likely to be coincidence. The answer is the same as I gave there:

When it comes to reporting income from transactions that occur on specific dates, with purchase and sales of real estate being a classic example, the taxpayer uses the spot rate (i.e. the currency conversion rate for converting the local functional currency into U.S. dollars on the day of the transaction.) ​

​

So for example, suppose Joe buys property in England on date X for £100,000. On date X £1 = US$1.25. Thus, for U.S. tax purposes the purchase price on date X, and starting basis in the property, is $125,000. Joe sells that property 2 years later on date Y for £110,000. On date Y £1=US$1.15. Thus, for US tax purposes the sales price on date Y is $126,500. Assuming that there were no adjustments to basis during those two years his gain on the sale of the property is $126,500 sales price - $125,000 basis = $1,500. So while he had a gain in the local currency of £10,000, his gain in dollars is just $1,500 due to the decline of the pound between the purchase and sale dates.​

​

So, here is your sample transaction:

let's assume an American citizen (and tax resident) has bought the real estate in Thailand in 2015 for THB 300 000, which was US$ 100 000 in accordance with the THB/US$ exchange rate(*) for the date the deal was closed. In 2019 he sells this real estate for THB 350 000, which was US$ 90 000 based on the exchange rate(**) for the date of the deal.

For U.S. tax law purposes, we determine the taxpayer's starting basis in the property in US dollars by taking the purchase price in Thai Baht (TB) 300,000 and using the currency conversion spot rate in effect on the day of purchase, which gives a starting basis of US$ 100,000. When he sells it four years later, we need to determine the sales price in US dollars, so we take the sales price of TB 350,000 and convert that to US dollars using the spot rate in effect on the date of the sale, which is US$ 90,000. Assuming no adjustments occurred to the basis in the property, the taxpayer has a loss for US income tax purposes of US$ 90,000 sales price less US$ 100,000 basis = US $10,000 capital loss.

So, no, he does not have a taxable gain and in that case there will be no US income tax criminal prosecution for failing to report that sale.

 

[LdiJ]

For most things (there are some odd stuff for section 987 units), the IRS standard is to use the current rate that is most indicative of the transaction as it takes place. So essentially you bought in 2015 for $100,000 and sold in 2019 for $90,000. This is capital loss (barring other adjustments) of $10,000.

If you don't know the actual "on the day of the transaction" rate, the IRS maintains average rates for the year going back a while which is the next best thing.

And of course that assumes that the OP has been filing the necessary annual documentation reporting the foreign assets.

 

[Taxing Matters]

And of course that assumes that the OP has been filing the necessary annual documentation reporting the foreign assets.

Those requirements for reporting foreign assets (primarily financial assets like bank accounts, etc) are, however, distinct from how the gain on the sale is determined for federal income tax.

 

[Hexensage]

Thank you guys for clarifying this topic for me.

@Taxing Matters world is small, uh? Yes, it's me. This particular point may ruin my plans (you know them), as the currency exchange rate has changed in the favor of that guy. So I decided to double-check this part and ask others on alternative forum too.

As far as I know reporting of foreign assets is not needed if the owner of the real estate is a private person (on the contrary of the trust), so looks like there was no violation of the law here.

 

[davew9128]

Thank you guys for clarifying this topic for me.

@Taxing Matters world is small, uh? Yes, it's me. This particular point may ruin my plans (you know them), as the currency exchange rate has changed in the favor of that guy. So I decided to double-check this part and ask others on alternative forum too.

As far as I know reporting of foreign assets is not needed if the owner of the real estate is a private person (on the contrary of the trust), so looks like there was no violation of the law here.

You're forgetting about the bank account the cash was in. No, owning real estate outside the US is not a reportable item. Selling it and holding the proceeds in an account IS. The other item not mentioned is foreign currency gain on any underlying mortgage which may have existed and was paid off.

 

[Taxing Matters]

You're forgetting about the bank account the cash was in. No, owning real estate outside the US is not a reportable item. Selling it and holding the proceeds in an account IS. The other item not mentioned is foreign currency gain on any underlying mortgage which may have existed and was paid off.

In the thread on the other forum the FATCA/FBAR issue was discussed, and there evidently was no mortgage on the property.

 

[Hexensage]

You're forgetting about the bank account the cash was in. No, owning real estate outside the US is not a reportable item. Selling it and holding the proceeds in an account IS. The other item not mentioned is foreign currency gain on any underlying mortgage which may have existed and was paid off.

Thank you for this input. As @Taxing Matters correctly mentioned there was no mortgage. However, smth. is not finally clear to me regarding reporting of the funds gained from the sale deal (that very "FATCA/FBAR issue" @Taxing Matters refers to above).

The funds (sales price of the real estate) were wired by the buyer (in foreign currency) to the seller's bank account in a foreign bank. This is a special account, which serves only for sale deal money transfer purposes and supposes no interest rate. According to the explanation on IRS website Form 8938 should be filed to IRS when the "total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year" (valid for the unmarried individual). So if the seller got less than $50,000 from that deal they do not have to file Form 8938 to IRS, correct? (What is "the last day of the tax year", by the way - which date is it?)

However, if the buyer transfers this money to the savings account (which supposes interest rate) he becomes obliged to file Form 8938, because he (based on what IRS website says) "has an interest in an account ... if any income, gains ... from holding or disposing of the account ... are or would be required to be reported, included, or otherwise reflected on your income tax return". So even if the money was on the savings account for a couple of months only and the interest gained was $200 tops, the Form 8938 is to be filed, right?

Finally, the same article says the person (regardless of their marital status) whose "aggregate value of financial accounts exceeds $10,000 at any time during the calendar year" has to file Form 114 to FinCEN. So if the seller got $40,000 from the deal (local currency converted to US$ based on the exchange rate valid on the day the sale deal was closed) he must file the Form 114, right? Regardless of whether the money hit the "non-interest" account or the savings one (with an interest rate).

 

[davew9128]

Yes the FATCA and FBAR requirements are not the same. There is no FATCA requirement here, there is an FBAR requirement. Personally, I would file both as a precaution because of the amount of possible penalty for failure to file the 8938, and because the extra effort to do so on my part as a preparer is literally a key stroke the generate the form from the same information used for the FBAR.

 

[Hexensage]

There is no FATCA requirement here, there is an FBAR requirement.

Thank you, noted! What about my assumption (above) that once funds hit the savings account (which supposes interest rate) the obligation to declare profit gained from the interest rate arises? Regardless of the size of the profit? And this is Form 8938 a.k.a. FATCA, right?

 

[Taxing Matters]

According to the explanation on IRS website Form 8938 should be filed to IRS when the "total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year" (valid for the unmarried individual). So if the seller got less than $50,000 from that deal they do not have to file Form 8938 to IRS, correct? (What is "the last day of the tax year", by the way - which date is it?)

The seller would have to report those funds in a foreign bank account if at any time during the year the total balance of reportable accounts exceeded $75,000 at any time during the year or exceeded $50,000 on the last day of the tax year. So if the seller's deposit of the sales funds, plus any other reportable accounts he had exceeded either of those two limits he would need to file the Form 8938. With rare exceptions individuals are calendar year taxpayers. Thus, the last day of the tax year for those individuals is December 31 unless the taxpayer died during the year, in which case the last day of his/her tax year is the date he or she died.

However, if the buyer transfers this money to the savings account (which supposes interest rate) he becomes obliged to file Form 8938, because he (based on what IRS website says) "has an interest in an account ... if any income, gains ... from holding or disposing of the account ... are or would be required to be reported, included, or otherwise reflected on your income tax return". So even if the money was on the savings account for a couple of months only and the interest gained was $200 tops, the Form 8938 is to be filed, right?

Wrong. That part of the IRS page just tells you when you have enough participation (interest) in a financial asset such that you need to report it the value of the assets exceeds the amounts discussed above. This use of the term interest means something different from interest paid on deposits or loans.

If the account generates interest, that must be reported on the U.S. person's income tax return, if he or she has enough income to be required to file a return. Because that interest must be reported on the income tax return, the taxpayer has a sufficient interest (different meaning here) in the account such that if the value of the account plus other reportable accounts exceeds either $75,000 at any time during the year or $50,000 at the end of the tax year (December 31 for an individual taxpayer still living on that day) the taxpayer needs to file a Form 8938. But even if not put in a savings account the taxpayer likely still has an interest in it such that its value must be counted in determining whether a Form 8938 is required to be filed. In short, depositing it into a savings account does not lower the threshold for filing the Form 8938. But of course the interest of whatever amount is taxable income.

Finally, the same article says the person (regardless of their marital status) whose "aggregate value of financial accounts exceeds $10,000 at any time during the calendar year" has to file Form 114 to FinCEN. So if the seller got $40,000 from the deal (local currency converted to US$ based on the exchange rate valid on the day the sale deal was closed) he must file the Form 114, right? Regardless of whether the money hit the "non-interest" account or the savings one (with an interest rate).

For the FinCen reporting requirement if the account exceeds $10,000 at any time during the year it needs to be reported, as the IRS chart clearly explains. Again, the distinction between a savings account versus some other kind of account doesn't really make a difference here.

 

[Hexensage]

In short, depositing it into a savings account does not lower the threshold for filing the Form 8938. But of course the interest of whatever amount is taxable income.

OK, got it. So if someone has $49,700 (which is not enough for mandatory filing of the Form 8938), but the money was on the savings account and once the profit (gained from the interest rate) exceeds $300 so that the overall sum is >$50,000, reporting to IRS becomes mandatory as the threshold is reached.

For the FinCen reporting requirement if the account exceeds $10,000 at any time during the year it needs to be reported, as the IRS chart clearly explains.

Is FinCEN (a bureau of the Department of the Treasury if I got it right) a federal body, or does it act (in its controlling function) on the state level too?

Thank you!

 

[Taxing Matters]

Is FinCEN (a bureau of the Department of the Treasury if I got it right) a federal body, or does it act (in its controlling function) on the state level too?

The Department of the Treasury is a department of the federal government and all of its agencies (IRS, FinCEN, Bureau of the Mint, etc) are therefore all federal agencies as well.

The states have their own tax and enforcement agencies.

 

[Hexensage]

@Taxing Matters Thank you, all is clear now.