US individual income tax implications of an appreciating US dollar
The unprecedented decision on June 23, 2016, by voters in the UK to exit the EU, known as "Brexit," created an environment of uncertainty for the foreseeable future, and likely for many more years to come. Despite having little, if any, immediate impact on UK direct and indirect taxes, the referendum vote by the UK to leave the EU sent an immediate negative shock to the economy. This article, originally published in “Global Tax Weekly,” discusses how economic events outside the US (e.g., Brexit), can impact asset and mortgage values for individuals relocating to the US.
The impact of Brexit on foreign currency and asset values
The unprecedented decision on June 23, 2016, by voters in the UK to exit the EU, known as "Brexit," created an environment of uncertainty for the foreseeable future, and likely for many more years to come.
In the short term, the UK government has appointed Theresa May as the new Prime Minister, who, in turn, has appointed her new cabinet members and a task force to negotiate Britain's exit from the EU. The medium- and long-term impact on the economy are speculative at this juncture and will evolve over time through secession negotiations. It is too early to tell to what extent the UK government will enact new law without regard to existing EU directives, the fundamental freedoms or principles established as controlling precedent under EU authority.
Despite having little, if any, immediate impact on UK direct and indirect taxes, the referendum vote by the UK to leave the EU sent an immediate negative shock to the economy. Most notably, the British Pound (GBP) fell to its lowest value in 30 years and has remained stagnant over the two months following the referendum vote.
There has been a similar impact on the Euro. International stock markets also experienced an immediate impact with the S&P 500, Dow Jones Industrial Average, the London FTSE 100, Germany's DAX and France's CAC 40 all falling in the early morning trading in the wake of Brexit. These changes have interesting consequences for individuals exposed to these currency and asset changes, who are also tied in some way to the US income tax system.
For example, in the case of rules governing US individual income taxation of personal transactions involving foreign currency, there are potential tax consequences connected to personal property acquired using foreign currency when the US dollar has appreciated in value since acquisition. In particular, employees of multinational companies on an international business assignment in the US may incur unexpected US tax costs for conducting personal affairs unrelated to their employment activity.
Many mobile employees are home owners and face decisions about what to do with their residence while going on an international business assignment. Some may decide to maintain their home while on an international assignment abroad; others may rent; and some may decide to sell.
Although there are tax consequences for each scenario; those employees considering selling are more likely to incur an unexpected US tax cost if they fail to consider the US tax rules in light of the current foreign currency market. In a worst-case scenario, such an individual may suffer a non-deductible economic loss on the sale of the property, yet, ironically, be required to pay US income tax on the "foreign currency gain" connected to the payoff of the foreign mortgage secured by the residence.
Although it might be easy to understand the personal, and therefore non-deductible, nature of losses from depreciating asset values, the taxation of currency gains in connection with reducing foreign mortgages may be more difficult to comprehend. In the full article, we will describe the history and application of these rules in more detail.
For a full list of references, download the article.