How to Report Brazilian Investments on US Taxes

Brazilian Investments Do Not Disappear When You Move to the US

Many Brazilians who become US residents keep investments in Brazil - a CDB here, a fundo there, maybe Tesouro Direto bonds or Brazilian stocks. Once you are a US resident or citizen, all of these must be reported to the IRS on your annual tax return, and some trigger complex filing requirements.

CDB, LCI, and LCA: Reported as Interest Income

CDB (Certificado de Deposito Bancario), LCI (Letra de Credito Imobiliario), and LCA (Letra de Credito do Agronegocio) are fixed-income instruments issued by Brazilian banks.

• Income from these instruments is treated as interest income for US tax purposes.
• Report on Schedule B of Form 1040.
• LCI and LCA are tax-exempt in Brazil, but that exemption does not apply in the US. The full interest amount is taxable.
• Brazilian withholding tax (IR) on CDB can be claimed as a Foreign Tax Credit on Form 1116.

Fundos de Investimento: The PFIC Problem

Most Brazilian fundos de investimento - including renda fixa, multimercado, and acoes funds - are classified as Passive Foreign Investment Companies (PFICs) under US tax law. This classification carries significant consequences:

Default PFIC rules (punitive):

• Gains are taxed at the highest ordinary income rate (37%) plus an interest charge applied retroactively to each year you held the fund.
• Distributions from the fund may also be subject to this treatment.

Better alternatives:

• QEF election (Qualified Electing Fund): Requires annual information from the fund. Brazilian funds rarely provide the necessary documentation for this election.
• Mark-to-market election: You report the year-end gain or loss each year as ordinary income/loss, avoiding the retroactive interest charge. This is generally more feasible for Brazilian funds.

Both elections require Form 8621 to be filed annually for each PFIC held.

Brazilian Stocks

Shares of Brazilian companies held directly (not through a fund) are treated similarly to US stocks:

• Dividends are taxable as ordinary income (Schedule B).
• Capital gains on sale are reported on Form 8949 and Schedule D.
• Brazilian withholding tax on dividends can be claimed as a Foreign Tax Credit.

Note that Brazilian companies listed on US exchanges (as ADRs) are also subject to these rules.

Tesouro Direto

Tesouro Direto bonds are Brazilian government securities. For US tax purposes:

• Interest payments are ordinary income, reported on Schedule B.
• Any capital gain on sale is reported on Form 8949.
• The bonds should be included in FBAR and Form 8938 calculations.

FBAR and FATCA for Brazilian Accounts

Brazilian investment accounts almost always trigger FBAR (FinCEN 114) if the aggregate value exceeded $10,000 at any point during the year. Form 8938 (FATCA) applies if the aggregate value of specified foreign financial assets exceeded $50,000 at year-end (for single filers).

IOF and Foreign Tax Credit

Brazil levies IOF (Imposto sobre Operacoes Financeiras) on many investment transactions. IOF is generally not creditable against US taxes because it is a transaction tax, not an income tax. The IR (income tax) withheld on CDB and other instruments is creditable.

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Brazilian investments involve PFIC rules, FBAR, FATCA, and foreign tax credits - all interacting in complex ways. The free Declara.Tax diagnostic identifies exactly which forms you need based on your specific investment portfolio.