Foreign Currency Account Taxation: Overhaul Affects US Dollars, Swiss Francs, and Other Currencies
Investors need to buckle up for tax changes as of 2025:
Here's the lowdown:
Starting January 1, 2025, investors with fixed-income foreign currency accounts will face capital gains tax on transactions, except those in dollars, francs, or similar currencies. Financial institutions have been given the green light to act as "tax collection points," with any realized foreign exchange gains and losses from fixed-income accounts being included in the capital gains tax calculation.
Time's up:
During the transition period until December 31, 2024, foreign exchange transactions could still be treated as "private disposal transactions" (i.e., tax-free gains after one year of holding). Financial institutions have the option to implement the new rules as early as 2024 or 2025.
The fine print:
The new tax rules have been etched in stone by a letter from the Federal Ministry of Finance (BMF) dated May 19, 2022. Every deposit in foreign currencies into a term or savings account will now be treated as an acquisition for tax purposes, and every withdrawal as a disposal. The same applies to reinvestment of foreign currency balances, with the tax treatment of foreign exchange gains being always based on the purchase date.
One silver lining:
There's a loophole left for affected foreign currency investors: The flat-rate tax on foreign exchange gains and losses will still not be levied on unearned income and checking accounts. Interest, dividends, and realized exchange gains remain tax-free in 2025 as long as the savings allowance of 1,000 euros (single) or 2,000 euros (married couples and registered partners) is not exhausted.
Dig deeper:
Foreign Asset Reporting: Law No. 14,754 (enacted 2023) introduced sweeping changes in the taxation of offshore assets and income, primarily requiring more detailed reporting of foreign investments and earnings. However, the focus is on income from assets rather than specific fixed-income accounts or capital gains on those instruments.
BMF Letter (May 19, 2022): Current news and legal summaries do not detail its provisions or how it would interacts with tax changes effective in 2025. It's possible that the letter would address regulatory or reporting guidance for brokers and market participants, but the specifics are yet-to-be-seen.
In light of the changes in taxation, individuals investing in foreign currency accounts might need to adjust their personal-finance strategies due to the upcoming capital gains tax on transactions, starting from 2025. Furthermore, understanding the new tax rules and relevant reporting obligations for offshore assets, as outlined in Law No. 14,754 of 2023, may prove crucial for those involved in foreign investing.
