Copyright 2012 by John T. Reed

I previously said that you have to report foreign financial accounts to the Treasury and/or IRS, but not the contents of foreign safe deposit boxes.

I recently noticed that the phrase relating to Treasury Form TDF 90-22.1 applies to “foreign accounts.” But Form 8938 applies to “financial assets.”

So how are “financial assets” defined, or more specifically, is foreign currency in a foreign safe deposit box reportable?

No.,,id=255061,00.html is an IRS web page titled “Basic Questions and Answers on Form 8938 (posted 2-29-12).” #4 says,

4. I directly hold foreign currency (that is, the currency isn't in a financial account). Do I need to report this on Form 8938?

Foreign currency is not a specified foreign financial asset and is not reportable on Form 8938.

I am not worried about reporting the money. I am not a crook and it would be no big deal. But the penalties for screwing up the report, even by honest mistake, are breathtaking—so much so that I suspect they are unconstitutional. So it is nice to know the safe deposit box currency will not get you a penalty. Plus, if it’s over $10,000 in a given time period, the bank would report giving it to you according to international rules designed to stop terrorism and money laundering and all that.

Other assets than currency?

What about other foreign assets that might be in a safe deposit box?

Here is the IRS’s answer to their question #1:

1. What are the specified foreign financial assets that I need to report on Form 8938?

If you are required to file Form 8938, you must report your financial accounts maintained by a foreign financial institution. Examples of financial accounts include:

Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.
And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person. Examples of these assets that must be reported if not held in an account include:

Stock or securities issued by a foreign corporation;
A note, bond or debenture issued by a foreign person;
An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty;
An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;
A partnership interest in a foreign partnership;
An interest in a foreign retirement plan or deferred compensation plan;
An interest in a foreign estate;
Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.
The examples listed above do not comprise an exclusive list of assets required to be reported.

If you do not have to file a U.S. federal income tax return, you do not have to file Form 8938 no matter how many foreign assets you have

Also, if you do not have to file a U.S. federal income tax return—because you do not have enough income for example—you are not required to file Form 8938. Here is IRS question #2 and their answer:

2. I am a U.S. taxpayer but am not required to file an income tax return. Do I need to file Form 8938?

Taxpayers who are not required to file an income tax return are not required to file Form 8938.

So you could be the richest man in America, but if all your assets were not income-producing—like foreign currency or gold—you would not have to file an income tax return and therefore not have to file a Form 8938. If $10,000 or more of those assets were in foreign financial accounts, you would have to file a Form TDF 90-22.1 with the Treasury.

Not care about the contents of the box, only existence of the assets

The Form 8938 requirements do not seem to care about the contents of foreign safe deposit boxes per se, but they do care about the above described “specified foreign financial assets” no matter where you keep them. For example, IRS seems interested in knowing whether some foreign guy owes you money, but not where you keep the IOU. And they are not interested in any foreign currency you own outside the U.S. Not yet that is.

Capital controls, if we get them, are a different law from tax law

Note that in the event of capital controls—a typical accompaniment of hyperinflation—foreign currency is declared contraband and you are not allowed to possess it within the U.S. They may not be happy about you possessing it outside of the U.S., but they really cannot do anything about it short of holding you for ransom.

I have only heard of that happening once in the U.S., to a real estate developer who put all his liquid assets in a trust in some tax haven like the Cayman Islands. When he lost a lawsuit and was ordered to pay a judgment, he said he had no control over the assets in the foreign trust. The judge put him and his wife in jail until he paid off the judgment, which he quickly and miraculously for a guy who had no control over the assets, did.

Plus capital controls typically do not prevent you as a person from going to another country and while you are there it would be necessary to possess foreign currency in order to pay for your living and traveling expenses.

Three risks

I have recommended having savings accounts in foreign countries as a hedge against U.S. dollar inflation. There are three risks:

• currency risk (the risk that the currency will go down in value compared to the U.S. dollar—e.g., my Australian and New Zealand accounts are currently down a nickel each per dollar)

• inflation of the foreign currency risk (if you have an account, there is a good chance that interest paid on it will rise to offset the inflation—but that’s not guaranteed; if you own currency itself, you will be hurt by inflation of that currency; deflation, on the other hand, will profit you if you hold that currency in a safe deposit box—you will be able to buy more stuff with it when you take it out, e.g., Swiss francs have had deflation twice since 2009)

• bank failure/theft of your safe deposit box contents (extremely remote—even in the Great Depression, people were allowed to remove the contents of their safe deposit boxes in failed banks or open banks that were not allowing, or restricting, withdrawals from your own bank account)

Safe deposit box?

Many of you have complained that finding a foreign bank where you could open a savings account was a pain in the neck. Simple solution, albeit with some inflation risk, is just buy the foreign currency in question in the form of foreign cash and put it in a foreign safe deposit box like one in Canada or Bermuda or the Cayman Islands or wherever you want.

How big of a box? A stack of 100 wrapped bills is about 6" x 2 1/2 "x 1/2". So, say, 20,000 of a currency in the form of 20-unit bills, e.g., $20 bills, would be ten stacks. Let’s say you have a 4 x 5 x 22 box, a standard small size. You could put two stacks side by side and stack them eight high and you could do that three times inside the box wasting four inches at one end. That’s 48 stacks containing 4,800 bills. That unused 4 x 4 x 5 space at the end could hold some unknown number of bills curved to reflect the lack of a 6-inch direction. How much value you could get into the box is a function of the denomination of the bills. If the box will hold 5,000 bills, that’s $50,000 in $10s; $100,000 in $20s; $250,000 in $50s; $500,000 in 100s. If you have more than that, or do not want 100s, you’ll need to rent a bigger box.

But let’s keep our eye on the ball. The big problem we are trying to deal with here is the U.S. government hyperinflating the U.S. dollar such that it rapidly becomes worthless. In comparison, worrying about things like mild inflation in some well-managed foreign currency or lack of interest being paid is trivial. I relate all of this to Anna Eisenmenger whose hyperinflation diary told what it was like on a day-by-day basis. She would have scoffed at the notion of being worried about regular old inflation, not hyperinflation, in another currency, or lack of interest being paid on a foreign currency account.

Gold is inferior to currency in a safe deposit box in one circumstance

And I sure do not want any gold owners citing lack of interest being paid on currency in a safe deposit box. Gold pays no interest either.

And in the event of deflation, currency in a safe deposit box is superior to gold. How so? I will use the phraseology I use in my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd Edition.

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Gold is a hard asset. Hard assets are two-way indexed. That means their purchasing power is roughly unchanged whether there is inflation, hyperinflation, or deflation. Foreign currency in a foreign safe deposit box is not indexed. That means it loses purchasing power when that currency is inflated and gains it when that currency is deflated. In other words, you can buy less stuff with it after a period of inflation but more stuff after a period of deflation.

When I was considering HSBC, I noted that the interest rate they paid on Canadian and Australian accounts reflected the inflation rates in those countries. But they paid zero interest on Swiss franc bank accounts. In that case, you lose no interest for having the Swiss francs in a safe deposit box rather than a bank account.

Gotta visit a safe deposit box

Remember, also that safe deposit boxes have high “transaction” costs, namely you have to physically visit the damned thing at least twice: once to put stuff in and once to take it out. So try to keep it close. The closest I can think of would be to live in Point Roberts, WA or any U.S. area within walking distance of the Canadian border and a Canadian bank branch (upper continental U.S. or Alaska-Canada border). Then your safe deposit visiting “transaction” costs would be zero or close to it.

Some of you may wonder if the same isn’t true of the Mexican border.

In theory, yes. But I am not recommending that any of you set foot in Mexico.

In contrast, I have money in a New Zealand bank. I have never been to that country, may never go there in the future, but I can access that money, or at least $1,500 per day of it, through ATMs here in the U.S. and around the world in seconds. I can also use wire transfers to get larger amounts, although there is about a $45 cost for that and it takes five or more days.

In other words, both foreign bank accounts and foreign safe deposit boxes have their advantages and disadvantages just like everything else.

Have a nice day protecting your life savings from hyperinflation & depression.

John T. Reed