Invest offshore in ETF’s

QUESTION: What are the tax implications for an american citizen of buying exchange traded funds in another currency in an offshore account?

REPLY: According to MSN Money Central, an exchange traded fund (ETF) is essentially an index fund. As such they would be treated as mutual funds by the IRS. Those that are available through U.S. exchanges make it easier for U.S. persons to participate in various foreign funds, without the hassle of actually owning a foreign mutual fund.

However, buying an ETF through an offshore account may defeat that benefit. And, buying it with a foreign currency adds to the complexity of the transaction but offers a way to trade against the US dollar.

First, the foreign ETF would be a passive foreign investment company or PFIC. U.S. shareholders can elect to report annual gains or losses as ordinary income using the mark-to-market election. The gain or loss

in share value on a qualified exchange would be the method of measuring the gain or loss, converted to US Dollars. A qualified exchange is difficult to define briefly and with accuracy — but most of the major national exchanges of major foreign countries should qualify.

If the election to pay tax on gains each year is not made, then a tax is computed when the fund shares are sold or otherwise disposed of. Gains or losses arising from currency differences would be included in the computation. At that time, the tax is subject to a very complicated and potentially costly method of taxation, as set forth in tax code section 1291.

In addition, the ETF would be considered to be a foreign financial account and should be reported on the FBAR Form TD F 90-22.1 if the various exceptions do not apply. For more on the FBAR form see

www.offshorepress.com/fbar.htm

By Vern Jacobs

www.offshorepress.com/offshoretax/otpfic.htm

www.moneycentral.msn.com/content/invest/mstar/P131899.asp

The comments in this memorandum are not intended to constitute an opinion regarding any specific tax issues because additional tax issues may exist that could affect the tax treatment of the tax issues addressed in this memo. This memorandum does not consider or reach a conclusion with respect to those additional issues and was not written and cannot be used for the purpose of avoiding penalties under code section 6662(d) with respect to those issues outside the scope of the memorandum. For further details see

www.offshorepress.com/vkjcpa/disclosurerules.htm

Invest offshore in ETF’s