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Paul Taliefero
Paul Taliefero, Enrolled Agent
Category: Tax
Satisfied Customers: 239
Experience:  19 years of experience in income taxes
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Is this income deferrable Do I owe capital gains

Customer Question

In the last year, I have sold some of stocks I owned in India. These stocks were acquired by me through my earnings as a resident of India and Indian stock purchase plans of my former employer.

These stocks have appreciated significantly and I decided to sell good amount of these stocks in the calendar year 2004. Company also declared special dividend last year (2004) and paid all shareholders a large sum of money.

Capital gains made by sale of these shares are not readily convertible to U.S currency as INR is still not convertible to any international currency. Most of people I know are of the opinion that these gains are not reportable for U.S. tax purposes.

Last year Indian government eliminated long term capital gains. This has complicated the situation further. So far, declaration of these stocks may have not mattered much as both countries had similar tax structures and if taxes were paid in India already, it would result in no/minimal net tax obligation in U.S. With elimination of long term capital gains this difference has become significant.

Publication 54 tallks about filing "Deferrable Foreign Income, pursuant to Rev. Rul.74-351". Is that how this income should be filed?

How should the cost basis of these gains be calculated? Should I take the cost basis as the fair market price of the stock when I became a resident of USA? Should the cost basis be used as the actual price I acquired these shares for? There are several hundred employees who share the same question. Between my colleagues, we have consulted several tax consultants with no consistent answer.

Even though knowing it a little complex question, I am hoping I can get some clear response.

Submitted: 11 years ago.
Category: Tax
Expert:  Paul Taliefero replied 11 years ago.

 This income is deferrable until the INR is convertible to US dollars.

This income is reported on a separate Form 1040. At the top you write "Report of Deferrable Foreign Income, pursuant to Rev. Rul. 74-351". This is treated as an informational return.

As soon as the INR becomes convertible to the US dollar, you will report it as income for that year.


Customer: replied 11 years ago.
Reply to Paul Taliefero's Post: Do appreciate the confirmation but I had figured out your reply as you will notice that I have posted the same thing in my own message too (from publication 54). My question which remains unaswered is really that am I supposed to pay any capital gain and if yes, what is my cost basis. Day I became resident? Purchase price? Most people just don't pay the capital gains.
Expert:  Paul Taliefero replied 11 years ago.

 You pay capital gains tax when the currency becomes convertible.

The cost basis is still your purchase price.

The holding period begins on the day of purchase.

If your currency never becomes convertible to US dollars, then you won't pay the tax. However, it will still be owed to the US government.

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