#FATCA Hunt, fluctuating exchange rates, #Americansabroad and the #Expatriation Game

 

Introductory thought 1:

Based on current tax law, for Americans living abroad, currency fluctuations create U.S. dollar capital gains or losses even on daily transactions as well as on movements of short and long term investments done in local currencies.  The exchange rate on the purchase date and the exchange rate on the sale date determine the capital gain for the U.S. Treasury.

Introductory thought 2:

We all know that US tax liability is computed in US dollars. We also know that exchange rates can play in rule in creating profits and losses. It would be interesting for people to comment on their experiences with how changes in exchange rates have created “phantom gains” for them. I think this could be very helpful evidence in working on how to get this whole thing (citizenship-based taxation) reversed. So, if anybody is reading this, please comment on your experiences.

In addition, the issue of exchange rates and a falling US dollar is extremely important on this issue of expatriation? Why?

As the US dollar falls, almost everybody will become a “covered expatriate”. That two million dollars will seem like nothing.

Obviously this is one more reason why you need to get on with the job, painful as it is, of expatriation and freeing yourself from this nightmare!

Since the election of Barack Obama the world has  been introduced to two new sports/games.

When it comes to playing games:

Some people make things happen, some watch things happen, some ask “what happened?”

Game 1: “FATCA Hunt”

fatcahunt

It’s like the old British Fox Hunt. Instead of hunting foxes, the world is now hunting U.S. persons. Your objective is to NOT be captured. Every action  causes a reaction. The reaction to “FATCA Hunt” is a new game played by U.S. citizens abroad. It’s called …

Game 2: “The Expatriation Game”

expatriationgame

Playing the “Expatriation Game” by “making things happen”

In a world where people are playing “FATCA Hunt”, U.S. citizens abroad are  forced to play the “Expatriation Game”.  In other words, it’s just not a good idea to be a U.S. person. The U.S. persons most at risk  are “Tax Compliant U.S. citizens abroad” who are “covered expatriates”. Therefore, it’s important that tax compliant U.S. citizens abroad play the “expatriation game” before they become “covered expatriates”. To put it simply: relinquish your U.S. citizenship prior to becoming a “covered expatriate”. One way to become a “covered expatriate” is to have $2,000,000 in assets. The $2,000,000 is calculated in U.S. dollars. Those who are close to the $2,000,000 threshold may want to take affirmative steps to reduce their net worth.

Playing the “Expatriation Game” by “watching things happen”

It’s possible for the value of your assets to fluctuate in value without doing anything at all. Examples include: the ups and downs of the stock market, the real estate market, etc. You aren’t doing anything. The value of your assets is just fluctuating. The exchange rate of the U.S. dollar is something that will affect the value of your assets – another example of “watching things happen”.

Playing the “Expatriation Game” by asking “What happened”?

It’s very simple. You lose.

Thoughts on interest rate fluctuations and “watching things happen”

Sir John Templeton was once asked:

How did he consider the impact of fluctuating exchange rates when making investment decisions. He answered that the only thing he knew was that exchange rates fluctuated. That’s the reality. Relative to other currencies the U.S. dollar can appreciate, depreciate or stay the same. The consensus is that, over the long term, the U.S. dollar will depreciate relative to other currencies. This means that it will be worth less relative to other currencies. For example, if the U.S. dollar depreciates relative to the Canadian dollar: fewer Canadian dollars will be needed to purchase a set number of U.S. dollars. Will this happen? Who knows? As Bertrand Russell reminds us:

Even when all the experts are in agreement they can be mistaken.”

As the U.S. dollar depreciates, fewer Canadian dollars are required to purchase (what don’t we say $2,000,000) U.S. dollars. This means that the faster the U.S. dollar depreciates, the faster U.S. citizens abroad will become “covered expatriates”. Notice that you are NOT doing anything yourself. It’s just that the the U.S. dollar is depreciating. Now in fairness, it’s also possible that the U.S. dollar could appreciate relative to the Canadian dollar. This is very possible in the short run. But, as John Maynard Keynes reminds us:

In the long run all U.S. citizens abroad are dead.

Therefore, the short run is worth considering.

Let’s consider a very simple example.

Parity – Where we have been for the last few years

January 1, 2013: 1 U.S. dollar = 1 Canadian dollar – Put it another way: 1 Canadian dollar will buy 1 U.S. dollar

Two million Canadian dollars = Two million U.S. dollars

Appreciation of U.S. dollar – At this moment we are seeing some appreciation of the U.S. dollar

January 1, 2015:  .50 U.S. dollar = 1 Canadian dollar – Put it another way: 1 Canadian dollar will buy half a U.S. dollar

Four million Canadian dollars = two million U.S. dollars

Depreciation of U.S. dollar – Believed to be the most likely longer run scenario

January 1, 2017: 2 U.S. dollar – 1 Canadian dollar – Put it another way: 1 Canadian dollar will buy 2 U.S. dollar

One million Canadian dollars = two million U.S. dollars

Conclusion: The exchange rate has a very significant impact on your net worth in U.S. dollars. Furthermore, exchange rates tend to change more slowly that the stock market. In the short run we have been seeing appreciation in the U.S. dollar. For example as of today’s date 1 Canadian dollar will buy about $.95 of a U.S. dollar. Note that this is about a 5% appreciation. What’s this worth to you? For every one million dollars you have, it has eroded the value by approximately $50,000. That’s worth considering.

The purpose of this post is NOT to give advice. It is simply to promote awareness. Remember, you don’t want to be the kind of person who asks:

“What happened?”

Note: All of these posts are of a general nature. They are not intended to and should not be understood to be financial, legal, tax advice (or any other kind of advice). They are to alert you to possible issues that need to be discussed with your adviser.

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