Question about treatment of currency loss on a foreign CD

Apr 15, 2019 1 Replies
J

I opened a CD in India which has a maturity period of 5 years. The interest compounds quarterly. I will not get any actual distribution from the CD till the 5 years are up. I have been paying tax on the interest income accrued each year. In 2018, the Indian currency weakened quite a bit. I have this question: I am wondering if I am eligible to offset the interest income by this 'loss' in currency rate. If the currency moved in my favor, this would result in a gain that would need to reported similarly. I searched for this topic online and am getting conflicting results. For example, in this post, the author suggests that it is possible to include a negative income related to loss on currency exchange:

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However, another user claims that this is not allowed:
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Yet another user thinks this loss can be reported as Section 988 loss:
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Please advise. Thanks


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A

I believe Example 10 in the Sec. 988 regulations is applicable here. Reg. 1.988-2. You start with the amount you paid for the CD converted from Rupees to $. Each year you compute the Rupee OID and convert it to $ OID based on the applicable exchange rate. You then add those $ you declared as income to the price you paid plus previous OID. At maturity, you convert the proceeds into $ and compare that to your adjusted basis (what you paid plus the accumulated OID). That will give you a gain or loss.

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