Demat Accounts & US Tax
Demat Accounts & US Tax: When a U.S. person has accounts in India that meet the IRS threshold for offshore reporting (FBAR & FATCA), it is important to evaluate the entire cross-section of accounts. This includes the Demat account. Oftentimes, shares and other securities that were previously held as a physical share are transitioned into Demat. Even if the Demat is dormant (not active) and not generating any income, it is still reportable. If a taxpayer is out of compliance, they may safely get into compliance by using one of the offshore amnesty programs. Let’s review the Demat Accounts & US Tax compliance rules.
What is a Demat Account?
Demat accounts are very popular in India. Demat is short for “Dematerialization” and it is the process of transitioning physical share certificates into electronic securities, with the value being credited to the owner’s “Demat” account.
There are many benefits to Dematerialization, including:
- Reduced Risk of Fraud
- Reduced Risk of “Losing” the Shares
- Increased Ease of the Transaction Process
- Reduced Cost (no “Stamp Duty”)
- Lack of “Risk” of having Paper Shares.
Are Demat accounts Reportable?
Yes. The reason why, is that a dematerialized account is an “Account.” In other words, when a person has a foreign account, the account has to be reported on an annual FBAR statement (Report of Foreign Bank and Financial Accounts) and/or 8938 (Statement of Specific Foreign Assets).
When a person holds share certificates (the “actual” certificates, which are not held in an account) thee generally do not need to be reported on an FBAR, but they do have to be reported on the form 8938 – if the threshold requirement is met).
- FBAR – Share Certificates Not Held in an Account are NOT reported
- 8938 – Share Certificates Not Held in an Account ARE reported.
Is my Demat a PFIC (Passive Foreign Investment Company)?
This is a very complicated analysis, which will have to be determined on a case-by-case basis. As to whether a Demat account is a PFIC will usually be determined by using “look-through rules” to determine what the specific investments are that are being held by the account.
In conclusion, Demat Accounts & US Tax and reporting requirements and compliance can be complex. Since the IRS has been aggressively enforcing compliance and penalties — getting into (and remaining in) compliance is crucial.
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