Re: Reporting Interest Income on Federal Tax Returns for foreign CD

[Arthur Rubin]

On Wednesday, September 28, 2016 at 9:31:45 PM UTC-7, dsfsa wrote:
> I am planning to have foreign CD accounts which will mature after 10 years. When should I report the interest earned from such accounts? Should I report it at the end of 10 years?The bank does not provide any 1099-INT forms.Also, there is a penalty if the amount is withdrawn prematurely.The interest is payable at the time of maturity along with the principal.

I'm sure you know about FINRA and FATCA reporting of foreign assets, so I'll just go into the income tax consequences.

You have to create a reasonable amortization schedule for the account, in the foreign currency. I'd try calculating the amount that would be available at the end of each year, using a fixed instantaneous interest rate, but other schedules might be acceptable. You might want to attach the schedule as an attachment to your return.

If the account is in a foreign currency, you have to convert the annual interest into US$, and report that amount. Currency conversion gain/loss is only reported on actual conversion into another currency.

--
Arthur Rubin, CRTP, AFSP, Brea, CA

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[Alan]

On 9/29/16 11:05 AM, Arthur Rubin wrote:
> On Wednesday, September 28, 2016 at 9:31:45 PM UTC-7, dsfsa wrote:
>> I am planning to have foreign CD accounts which will mature after 10 years. When should I report the interest earned from such accounts? Should I report it at the end of 10 years?The bank does not provide any 1099-INT forms.Also, there is a penalty if the amount is withdrawn prematurely.The interest is payable at the time of maturity along with the principal.
>
> I'm sure you know about FINRA and FATCA reporting of foreign assets, so I'll just go into the income tax consequences.
>
> You have to create a reasonable amortization schedule for the account, in the foreign currency. I'd try calculating the amount that would be available at the end of each year, using a fixed instantaneous interest rate, but other schedules might be acceptable. You might want to attach the schedule as an attachment to your return.
>
> If the account is in a foreign currency, you have to convert the annual interest into US$, and report that amount. Currency conversion gain/loss is only reported on actual conversion into another currency.
>
> --
> Arthur Rubin, CRTP, AFSP, Brea, CA
>

Adding to Arthur's reply for clarity....

Any CD issued with a maturity date in excess of one year that does not
credit interest at least annually, is considered to be a debt instrument
issued at a discount and is subject to OID (Original Issue Discount)
rules. You are required to report as interest income the OID as it
accrues over the term of the CD. The amount of OID that you report each
year as taxable interest is added to your cost of the CD to obtain your
adjusted cost basis.