Tax provision on Foreign currency Gain and Loss.

I get this question lot of times ,how to deal with tax provision on Foreign Currency Gain and Loss.

Most of my friends and clients who transferred the money to India in 2008 when 1 $ is equal to 45 rupees is concerned because in actual the value of there money got depreciated .

Let us take simple example

If Mr.A transferred $ 10,000 in 2008 at the exchange rate of $1 = 45 , that comes to 45,0000 rupees . for all these years the money is been sitting in NRE account earning interest .

Now let us assume Mr.A is in need of money in US and wants to bring the money back in US in 2015 since the Indian Rupee depreciated against US dollar in recent years and $1 = 60 he will only be able to get back 45,0000/60 = $7500 .

On absolute level not taking Interest he earned in Indian account into consideration he lost $ 2,500.

Will  he able to claim the loss as deduction is a big question.
Good news is he will be able to claim the loss as expense under IRC Code 988.

Let me give you a synopsis of IRC code 988

1. Where there are currency gains or losses in connection with a trade or business or with the management or administration of investment assets, the gain is treated as an ordinary gain (rather than as a capital gain) and any loss is generally treated as an expense.

2. Where currency gains or losses are incurred in connection with the purchase of an investment, the gain or loss on the currency change on realization (usually from selling) is a capital gain or loss and is included as part of the total capital gain or loss on the investment.

3. Currency gains of $200 or less that arise from personal transactions (not for investment or business) are not taxable, but any personal currency losses are not deductible.  A personal transaction includes any gain or loss arising from travel even if the travel is business related.

4. Any currency gains in excess of $200 per personal transaction (per trip or per purchase) are treated as a capital gain (long term or short term depending on your holding period).

The provisions of the IRC Code 988 are very complex and confusing.

It is very important that US Persons who have currency gain or losses consult their tax advisor before they disclose anything on their US income tax returns