How fluctuating exchange rates, generate phantom gains + losses for #americansabroad – http://t.co/jyyFvrr4t3 – Real estate considerations
— U.S. Citizen Abroad (@USCitizenAbroad) July 16, 2013
Introductory thought 1:
Based on current tax law, for Americans living abroad, currency fluctuations create U.S. dollar capital gains or losses even on daily transactions as well as on movements of short and long term investments done in local currencies. The exchange rate on the purchase date and the exchange rate on the sale date determine the capital gain for the U.S. Treasury.
Introductory thought 2:
We all know that US tax liability is computed in US dollars. We also know that exchange rates can play in rule in creating profits and losses. It would be interesting for people to comment on their experiences with how changes in exchange rates have created “phantom gains” for them. I think this could be very helpful evidence in working on how to get this whole thing (citizenship-based taxation) reversed. So, if anybody is reading this, please comment on your experiences.
In addition, the issue of exchange rates and a falling US dollar is extremely important on this issue of expatriation? Why?
As the US dollar falls, almost everybody will become a “covered expatriate”. That two million dollars will seem like nothing.
Obviously this is one more reason why you need to get on with the job, painful as it is, of expatriation and freeing yourself from this nightmare!
Since the election of Barack Obama the world has been introduced to two new sports/games.
When it comes to playing games:
Some people make things happen, some watch things happen, some ask “what happened?”
Game 1: “FATCA Hunt”
It’s like the old British Fox Hunt. Instead of hunting foxes, the world is now hunting U.S. persons. Your objective is to NOT be captured. Every action causes a reaction. The reaction to “FATCA Hunt” is a new game played by U.S. citizens abroad. It’s called …
Game 2: “The Expatriation Game”
Playing the “Expatriation Game” by “making things happen”
In a world where people are playing “FATCA Hunt”, U.S. citizens abroad are forced to play the “Expatriation Game”. In other words, it’s just not a good idea to be a U.S. person. The U.S. persons most at risk are “Tax Compliant U.S. citizens abroad” who are “covered expatriates”. Therefore, it’s important that tax compliant U.S. citizens abroad play the “expatriation game” before they become “covered expatriates”. To put it simply: relinquish your U.S. citizenship prior to becoming a “covered expatriate”. One way to become a “covered expatriate” is to have $2,000,000 in assets. The $2,000,000 is calculated in U.S. dollars. Those who are close to the $2,000,000 threshold may want to take affirmative steps to reduce their net worth.
Playing the “Expatriation Game” by “watching things happen”
It’s possible for the value of your assets to fluctuate in value without doing anything at all. Examples include: the ups and downs of the stock market, the real estate market, etc. You aren’t doing anything. The value of your assets is just fluctuating. The exchange rate of the U.S. dollar is something that will affect the value of your assets – another example of “watching things happen”.
Playing the “Expatriation Game” by asking “What happened”?
It’s very simple. You lose.
Thoughts on interest rate fluctuations and “watching things happen”
Sir John Templeton was once asked:
How did he consider the impact of fluctuating exchange rates when making investment decisions. He answered that the only thing he knew was that exchange rates fluctuated. That’s the reality. Relative to other currencies the U.S. dollar can appreciate, depreciate or stay the same. The consensus is that, over the long term, the U.S. dollar will depreciate relative to other currencies. This means that it will be worth less relative to other currencies. For example, if the U.S. dollar depreciates relative to the Canadian dollar: fewer Canadian dollars will be needed to purchase a set number of U.S. dollars. Will this happen? Who knows? As Bertrand Russell reminds us:
“Even when all the experts are in agreement they can be mistaken.”
As the U.S. dollar depreciates, fewer Canadian dollars are required to purchase (what don’t we say $2,000,000) U.S. dollars. This means that the faster the U.S. dollar depreciates, the faster U.S. citizens abroad will become “covered expatriates”. Notice that you are NOT doing anything yourself. It’s just that the the U.S. dollar is depreciating. Now in fairness, it’s also possible that the U.S. dollar could appreciate relative to the Canadian dollar. This is very possible in the short run. But, as John Maynard Keynes reminds us:
“In the long run all U.S. citizens abroad are dead.“
Therefore, the short run is worth considering.
Let’s consider a very simple example.
Parity – Where we have been for the last few years
January 1, 2013: 1 U.S. dollar = 1 Canadian dollar – Put it another way: 1 Canadian dollar will buy 1 U.S. dollar
Two million Canadian dollars = Two million U.S. dollars
Appreciation of U.S. dollar – At this moment we are seeing some appreciation of the U.S. dollar
January 1, 2015: .50 U.S. dollar = 1 Canadian dollar – Put it another way: 1 Canadian dollar will buy half a U.S. dollar
Four million Canadian dollars = two million U.S. dollars
Depreciation of U.S. dollar – Believed to be the most likely longer run scenario
January 1, 2017: 2 U.S. dollar – 1 Canadian dollar – Put it another way: 1 Canadian dollar will buy 2 U.S. dollar
One million Canadian dollars = two million U.S. dollars
Conclusion: The exchange rate has a very significant impact on your net worth in U.S. dollars. Furthermore, exchange rates tend to change more slowly that the stock market. In the short run we have been seeing appreciation in the U.S. dollar. For example as of today’s date 1 Canadian dollar will buy about $.95 of a U.S. dollar. Note that this is about a 5% appreciation. What’s this worth to you? For every one million dollars you have, it has eroded the value by approximately $50,000. That’s worth considering.
The purpose of this post is NOT to give advice. It is simply to promote awareness. Remember, you don’t want to be the kind of person who asks:
Note: All of these posts are of a general nature. They are not intended to and should not be understood to be financial, legal, tax advice (or any other kind of advice). They are to alert you to possible issues that need to be discussed with your adviser.
Since the time of Richard Nixon, the US dollar has fluctuated freely against other currencies because he took the dollar of the gold standard. It is impossible to print gold, and, when on the gold standard, international settlements can take place without paying an exchange rate to the money changers. The removal of the gold standard has thus made it possible for governments to spend profligately, and for the bankers and other money changers to profit handsomely, when dealing with international exchange. The losers are all the rest of us–unless you happen to be savvy or lucky private trader who succeeds in playing the game and winning. Every time a good is bought from another country or sold to another country (since US dollars are the internationally accept currency of trade), the US banks and the US government wins. They also win with the bracket creep–inflation that pushes people into higher tax brakets–or lower reporting thresholds–such as FBAR with its $10,000 aggregate, which in the early 70s when the bank Secrecy Act was passed would have been today’s inflation adjusted of conservatively $80,000-it is ridiculous for today overseas US person with $10,000 aggregate to fill out an FBAR (depending on how you decide to adjust the dollar for inflation).
The concerns of this post were the reason that I had to relinquish my US citizenship. The actual numbers forced me to do this. But when you consider the spectre of hyperinflation of the US dollar, the prospect of a later expatriation becomes very frightening.
In the event of hyperinflation in the United Shakes, midget Siamese twin Canada will not enjoy going on life support while yoked to a corpse. The border is a piece of paper. Just like all your money, except for the gold you cannot eat.
That was my thought exactly. I was well away from the “covered” threshold. But since 1974, when I first started paying attention to exchange rates, they have been all over the place.
Plus, maybe the nuts in Congress who make the rules might lower the threshold. That’s what the German government did with the Reichsfluchtsteuer in the 1930s, when it wasn’t having the desired effect. They simply lowered the threshold by a factor of 4. Initially the Reichsfluchtsteuer was enacted in 1931 an attempt to prevent capital flight by “rich” people, essentially what the current expatriation tax is intended to do now. In 1934, after the Nazi takeover, they decided they needed to extract capital from those fleeing for non-economic reasons, mainly Jews. So they dropped the threshold and broadened the base of what counted.
The expatriation tax is exactly the same as the Reichsfluchtsteuer in concept. That’s why I find Senator Schumer’s attempts to make its provisions more draconic so ironic. With his Jewish heritage, he ought to know better.
Anyway, if you are not near the threshold, like where you are living, qualify for citizenship there and are sure you do not want to return to the US to live, then expatriate ASAP!
Yes- I agree with you. The dollar dropped a few years ago and that cost me a lot in “phantom gains”. I was pretty shocked.
simple strategy: keep all your savings in cash and don’t buy property or anything that will lead you to be in a position to create capital gains – phantom or otherwise.
If the US dollar plummets in value (and in effect prestige), the US’s global clout and its ability to enforce extraterritorial laws like FATCA will also plummet.
Take the United Kingdom, June 1914 = world’s most formidable industrial, trade, political, military, economic and maritime power in the history of the world at that time. With about a quarter of the world “under British rule” and it’s gunboat diplomacy navy, it could enforce its will wherever it wanted. Back then, the Pound Sterling was the world’s premier reserve currency. 1 pound back then bought 25 Swiss Francs.
Take the United Kingdom 2013 = as Jim Roger’s would say, “the UK is finished and I hate to say it”. How much does 1 pound buy? 1.42 Swiss Francs.
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@nn, Which cash? The plummeting values of all world-wide fiat currencies (i.e., paper money) on earth in history suggest that only precious metals is a worthy long-term store of monetary value.
” In 1934, after the Nazi takeover, they decided they needed to extract capital from those fleeing for non-economic reasons, mainly Jews. So they dropped the threshold and broadened the base of what counted.
The expatriation tax is exactly the same as the Reichsfluchtsteuer in concept. That’s why I find Senator Schumer’s attempts to make its provisions more draconic so ironic. With his Jewish heritage, he ought to know better.”
The U.S. expatriation tax is aimed at people. It is NOT aimed at people who leave the United States physically. It is not aimed at U.S. citizens who move abroad. It is aimed at aimed at people who insult the United States by exercising their right to NOT be a citizen. The U.S. regards its citizens as property. In the same way that some slaves in the South who wanted their freedom were required to purchase it, U.S. citizens who no longer want to be property of the United States are required to purchase their freedom.
Much of the discussion of the 877A tax refers to it as an Exit tax. It’s not a tax on exiting the U.S. It’s a fine imposed, mostly on non-U.S. residents for not wanting to live in the U.S.
As I understand the Reichsfluchtsteuer it was a fee that needed to be paid to physically leave. The US expatriation tax is a charge imposed (in most cases) after the person has already left. Could it be that the U.S. expatriation tax is worse than the Reichsfluchtsteuer?
Exchange rates can create a phantom loss, too. I sold some funds at a loss last year. I don’t quite understand it, but my loss in Canadian dollars was substantially higher than my loss in US dollars. And because of different accounting rules, my losses available to carry forward in the US are even lower.