U.S. Expats Balk at Tax Law: American Citizen Renunciations Are Soaring

Re:U.S. Expats Balk at Tax Law: American Citizen Renunciatio... by patio11 on Tuesday August 13, 2013 @06:39AM (#6204956)

First of all, merely having a number increment on your FBAR in year N and year N+1 does not cause that delta to become taxable income. (And, for that matter, failing to have a delta does not show absence of income. For example, if you earn 100k euros in a year and consume 100k euros, your accounts will show a delta of nothing, but you still earned 100k euros.)

Second, the US does not tax unrealized capital gains. In the situation you have just described, you have not realized any capital gains and have no taxable income, even if you believe that receiving currency in year N and disbursing of it in year N+X counts as capital gains if the currency has appreciated against the dollar. This interpretation is contrary to what the IRS will tell you is the law.

Should you want to actually use the money, you should say that "My cost basis in the 200k Euros is 200k Euros. I liquidated them at their fair market value, of 200k Euros. This gives me a capital gain of 0 Euros, which when I put it on forms I will convert into dollars, for capital gains of $0." There are more complicated things you'll want to do if you operate a currency exchange business, but that isn't relevant to you.

If you disagree that this is the correct interpretation of US tax law, you can do what I did and phone the IRS. They'll explain it to you.

If you doubt this is correct, use some of the 200k Euros to have a brief chat with a tax accountant. I know this sounds new and scary for you. It was new and scary for me, too, eight years ago. It's a lot easier than you think it is.

[ Parent | on HN ]

Re:U.S. Expats Balk at Tax Law: American Citizen Renunciatio... by gsb on Tuesday August 13, 2013 @08:05AM (#6205182)

The parent may have been confused about when a transaction takes place. They would only have a taxable event for their currency at the time they converted between different currencies. However, the advice you give about calculating capital gain in foreign currency is VERY bad. You may have been given bad advice. In particular, the IRS helplines are completely inaccurate for issues arising from foreign residence. If you get a personal letter ruling then their advice is binding. Advice over the phone is not binding.

For a US citizen, the functional currency for personal taxation is ALWAYS the US dollar. See particularly points 12 and 13 of http://openjurist.org/93/f3d/26/quijano-v-united-states

Basis must always be converted to US dollars using the exchange rate at the time of purchase, and sale price likewise converted to US dollars using the exchange rate at the time of sale. The US capital gain is then the difference between these two US dollar values.

This can easily (and frequently does) lead to having to pay a capital gain on a transaction that lost money in the currency in which it actually took place. Particularly the last decade was bad for this with the falling US dollar.

Many expats (if they are aware of their obligation to worldwide taxation which most are not) may calculate this incorrectly. This will often be ignored by the IRS, because they have no matching information to use to flag the foreign transaction for audit. However, with FATCA coming, the IRS will finally get some matching information and it is a strong possibility for nasty surprises in the future.

[ Parent | on HN ]