What are the tax issues with a foreign loan converted to USD?

Unsolved
1

I have dual citizenship in the US and another country. I can take out a loan in the other country at a low interest rate. If I borrow $10k in that foreign currency and convert it to US dollars right away, would there be any tax issues with this?

2

You’ll need to watch out for phantom gains when exchange rates change as you repay the loan. That could have tax implications.

3

If you don’t sell the loan for more than face value, you likely won’t have any gains, so there shouldn’t be any taxes. But if you do sell it for more, that could count as cancellation of debt income under IRS rules. Also, keep an eye on any gains or losses from the currency exchange itself.

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Peyton said:
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I don’t understand how it could be taxable. There’s no profit or income here—I still owe the loan.

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Gale said:

Peyton said:
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I don’t understand how it could be taxable. There’s no profit or income here—I still owe the loan.

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@Peyton
That’s not how loans work in the US. Loans aren’t considered income, whether it’s a mortgage, car loan, or personal loan.

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Gale said:
@Peyton
That’s not how loans work in the US. Loans aren’t considered income, whether it’s a mortgage, car loan, or personal loan.

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Peyton said:

Gale said:
@Peyton
That’s not how loans work in the US. Loans aren’t considered income, whether it’s a mortgage, car loan, or personal loan.

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Could you share an IRS rule that specifically states foreign loans are treated as income? I can’t find anything that says that.

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@Gale
You’re correct. Loans, even foreign ones, are not considered income in the US.

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Milo said:
@Gale
You’re correct. Loans, even foreign ones, are not considered income in the US.

Thanks for clarifying. What about converting the foreign currency into US dollars? Does that change anything?

12

@Gale
Converting currencies doesn’t create taxable income. The loan is your money once you receive it, and switching it to USD doesn’t change that. But when you repay the loan, if the exchange rate works in your favor and you pay back less in USD, that could count as a taxable gain.

13

@Milo
Got it, thanks for explaining!

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Gale said:
@Milo
Got it, thanks for explaining!

I think you’re covered now. Glad it was clarified.

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@Gale
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Peyton said:
@Gale
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I think you’re misunderstanding. The tax applies to the interest earned by the lender, not the loan amount itself.

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Gale said:

Peyton said:
@Gale
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I think you’re misunderstanding. The tax applies to the interest earned by the lender, not the loan amount itself.

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@Peyton
Exactly, the loan amount isn’t taxable. That’s where the confusion seems to be.

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@Peyton
This whole situation sounds strange.