Let's take the below example -

I send $1000 to India NRE account when exchange rate is $1 = Rs. 70

Money in NRE account = $1000 x 70 = Rs. 70000

I keep that money in NRE account at 7% interest Rs. 4900 for a year

Then I transfer the money back to US account when exchange rate is $1 = Rs. 65

Do I just pay tax on the interest (Rs. 4900/Rs. 65 = $75 interest) or do I have to pay taxes due to exchange rate as well? (Rs. 74900/ Rs. 65 = $1152, gain of $152, so tax for this)

  • Thanks Dilip for the quick reply. Yes, I'm a US resident for tax purposes. So I make a gain of $152 and don't even have to pay taxes on that if I bring the money back? – abhgk Jun 13 '19 at 22:56
  • @DilipSarwate Are you saying that ForEx profits aren't taxable? – Acccumulation Jun 13 '19 at 23:59

Yes, you would have to pay taxes on both the interest and the appreciation of the RS. It would be counted as trading foreign currencies. There are a couple exceptions in the law but this would not fall under one of them. The exceptions normally occur in cases like you sell an asset in a different currency and while you are waiting for payments to clear, the value changes then you would not have to pay extra based on the new gains.You can read more about the laws here.

You might not have to pay the gains if you just held some currency at home especially since it is only $1000. In the case of being audited, you could say something along the lines of "I was saving this for when I next take a vacation there" However, in your case, you put the money into an account which makes it more necessary to pay taxes on the gains since your goal in doing so was to make money. I hope this helps!

  • 1
    Hi @MingChang - it may help to actually paste the relevant texts from the link you shared. Unless the link is a permanent one it may become obsolete soon. Also relevant links to the laws from official revenue dept or legal dept pages maybe better than from a .edu – perennial_noob Jun 17 '19 at 17:53
  • @perennial_noob I just changed the link to a presentation on 988 by the IRS. Thanks for the suggestion! – Gerold Astor Jun 17 '19 at 18:00
  • @MingChang - thank you for the answer! Do you know roughly how much the tax amount/% would be? I'm basically weighing my options. If I'm going to lose most of the money I made paying taxing I would rather not go through the hassle. – abhgk Jun 20 '19 at 16:14
  • @abhgk it really depends on your US income. Capital gains taxes vary depending on your income. You can read more about it here. turbotax.intuit.com/tax-tips/investments-and-taxes/… – Gerold Astor Jun 20 '19 at 16:18
  • @abhgk im assuming it would be around 25% since they are short term capital gains. If you think my answer is correct could you accept it? – Gerold Astor Jun 20 '19 at 16:19

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