Interest from a foreign certificate of deposit is taxed as ordinary income on your federal return, and foreign CD tax reporting typically means three things: reporting the interest on Schedule B of Form 1040, tracking any currency gain or loss separately under Internal Revenue Code Section 988, and filing an FBAR and/or Form 8938 if your foreign holdings cross the thresholds. Because the U.S. taxes worldwide income for citizens and resident aliens, the interest itself is treated the same as domestic interest.1Internal Revenue Service. Reporting Foreign Income and Filing a Tax Return When Living Abroad Everything else about the return is where the complexity lives.
Reporting the Interest on Your Return
Foreign CD interest goes on Schedule B, on the same line you would use for any domestic bank. You list the foreign bank’s name and the dollar-equivalent interest for the year. If you hold any financial account in a foreign country, you also answer “Yes” to the foreign accounts question in Part III of Schedule B, even when no FBAR is required. The IRS definition of a financial account explicitly includes time deposits, so a CD counts.2Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040)
Every foreign-currency amount has to be translated into dollars. The IRS has no single official rate but generally accepts any consistently used posted rate.3Internal Revenue Service. Yearly Average Currency Exchange Rates For interest received on a specific date, most taxpayers use the spot rate that day. The IRS also publishes yearly average rates that you may use instead, as long as you apply the same method consistently across the return. Keep records of the rate you used for each conversion; the IRS can request documentation.
If your CD pays interest only at maturity rather than periodically, it likely qualifies as an original issue discount instrument. OID is the gap between what you paid for the CD and what it will pay at maturity, and the IRS treats it as interest that you accrue and report each year, even though no cash has changed hands.4Internal Revenue Service. Publication 1212 – Guide to Original Issue Discount Each year’s accrual gets converted at the exchange rate for that period. A narrow de minimis exception treats OID as zero when total OID is less than one-quarter of one percent of the maturity value multiplied by the number of full years to maturity.
Currency Gain or Loss Under Section 988
Separate from the interest, exchange-rate movement between the day you buy the CD and the day you receive payments or principal creates its own taxable event. A foreign-currency-denominated CD is a Section 988 transaction because it is a debt instrument whose value is determined by reference to a nonfunctional currency.5eCFR. 26 CFR 1.988-1 – Certain Definitions and Special Rules Any gain or loss caused by exchange-rate changes is computed separately from interest and treated as ordinary income or ordinary loss.6Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions
An example makes it concrete. You buy a €10,000 CD when the euro trades at $1.10, so your cost basis is $11,000. At maturity, the euro is at $1.20, and you receive the dollar equivalent of $12,000 in principal. The $1,000 difference is a Section 988 currency gain, taxed as ordinary income on top of the interest. If the euro had fallen to $1.00, you would instead have a $1,000 ordinary loss usable against other income.
Currency gains and losses under Section 988 are reported as ordinary income on line 8 of Schedule 1, or as an adjustment if a loss. You may have read that taxpayers can elect capital-gain treatment for Section 988 gains, but that election is narrow: it covers forward contracts, futures, and certain options that are capital assets, and it must be made before the close of the day the transaction is entered into.6Office of the Law Revision Counsel. 26 USC 988 – Treatment of Certain Foreign Currency Transactions A standard foreign CD does not qualify, so your currency gains and losses will be ordinary.
Foreign Tax Credit for Withheld Tax
Many countries withhold tax on interest paid to nonresidents. When that happens, you can generally claim a Foreign Tax Credit to avoid double taxation.7Internal Revenue Service. Foreign Tax Credit The credit offsets your U.S. tax dollar for dollar but cannot exceed the U.S. tax you would owe on that foreign income. The limit is calculated by multiplying your total U.S. tax by the ratio of foreign-source taxable income to total taxable income.8Internal Revenue Service. Foreign Tax Credit – How to Figure the Credit
Before assuming you’ll pay the statutory withholding rate, check whether the U.S. has an income tax treaty with the country where your CD is held. Interest is one of the categories most often addressed in treaties, and reduced rates or exemptions are common.9Internal Revenue Service. Reduced Foreign Taxes Under Treaty Provisions If a treaty entitles you to a lower rate than the foreign bank actually withheld, the IRS will only credit you at the treaty rate. Recovering the excess is your job with the foreign tax authority.
There is a useful shortcut for small amounts. If your only foreign-source income is passive (interest qualifies), your total creditable foreign taxes are $300 or less ($600 on a joint return), and everything is reported on a payee statement like a 1099-INT, you can claim the credit directly on Form 1040 without filing Form 1116.8Internal Revenue Service. Foreign Tax Credit – How to Figure the Credit Above those thresholds, Form 1116 is required.
FBAR (FinCEN Form 114)
If the combined peak value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file a Report of Foreign Bank and Financial Accounts with the Financial Crimes Enforcement Network.10Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts The threshold is cumulative across every foreign account you hold, not per account. A $6,000 CD in one country and a $5,000 checking account in another trip the requirement even though neither alone exceeds $10,000.
The FBAR is filed electronically through FinCEN’s BSA E-Filing System, separately from your tax return.11Financial Crimes Enforcement Network. How Do I File the FBAR The deadline is April 15, with an automatic extension to October 15 that requires no separate request.12Internal Revenue Service. Report of Foreign Bank and Financial Accounts For each account you report the account number, the institution’s name and address, and the maximum value during the year, converted to dollars at the Treasury’s year-end rate. If you hold a foreign CD jointly with a non-U.S. citizen spouse, you report the full balance on your FBAR, not just your share. The non-U.S. spouse generally has no FBAR obligation unless they qualify as a U.S. resident alien.
Form 8938 (Statement of Specified Foreign Financial Assets)
Form 8938 is filed with your tax return and covers a broader range of foreign assets than the FBAR, including foreign bank accounts, securities, and interests in foreign entities.13Internal Revenue Service. Basic Questions and Answers on Form 8938 The thresholds are higher than the FBAR’s and depend on where you live and how you file.
For taxpayers living in the United States:14Internal Revenue Service. Summary of FATCA Reporting for U.S. Taxpayers
- Single or married filing separately: total value exceeds $50,000 on the last day of the tax year, or $75,000 at any point during the year.
- Married filing jointly: total value exceeds $100,000 on the last day of the tax year, or $150,000 at any point during the year.
For U.S. taxpayers living abroad, the thresholds are substantially higher:15Internal Revenue Service. Comparison of Form 8938 and FBAR Requirements
- Single or married filing separately: total value exceeds $200,000 on the last day of the tax year, or $300,000 at any point during the year.
- Married filing jointly: total value exceeds $400,000 on the last day of the tax year, or $600,000 at any point during the year.
Because the FBAR and Form 8938 serve different purposes with different thresholds, you may need to file one, both, or neither depending on the size of your holdings and your filing status.
Penalties for Reporting Failures
Penalties for missed foreign-account filings are disproportionate to the income a CD typically generates, which is why compliance matters more here than for almost any other fixed-income investment.
For the FBAR, the statutory base penalty for a non-willful violation is up to $10,000 per report, adjusted annually for inflation. The Supreme Court held in 2023 that non-willful penalties apply per report filed (or not filed), not per account, which limits exposure for investors holding several accounts.16Supreme Court of the United States. Bittner v. United States Willful violations carry far heavier consequences: the greater of a six-figure inflation-adjusted amount or 50% of the account balance at the time of the violation, plus possible criminal prosecution.
For Form 8938, failing to report carries a $10,000 penalty. If you still haven’t filed 90 days after the IRS notifies you, an additional penalty of up to $50,000 applies. On top of that, any tax underpayment connected to undisclosed foreign assets triggers a 40% accuracy-related penalty rather than the usual 20%, and criminal penalties are also on the table.17Internal Revenue Service. FATCA Information for Individuals On a CD earning 3% or 4%, these penalties can exceed the entire balance in a single year of non-compliance. Note also that under FATCA, foreign financial institutions themselves report accounts held by U.S. taxpayers to the IRS, so non-disclosure is unlikely to stay hidden.18U.S. Department of the Treasury. Foreign Account Tax Compliance Act
One Boundary Worth Noting
A foreign CD held directly at a foreign bank is not covered by the FDIC, which insures deposits only at U.S.-based institutions up to $250,000 per depositor per bank.19Federal Deposit Insurance Corporation. Deposit Insurance FAQs Whatever protection exists comes from the deposit-guarantee system of the country where the bank operates. That does not change your U.S. tax or reporting obligations, but it is worth pricing into your expected return before you chase a higher rate abroad.