How to Determine the FMV of Certain Specified Assets?

Fair Market Value (FMV) is the price an asset would sell for on the open market between a willing buyer and seller, with both having reasonable knowledge of the facts and neither being under pressure to act. U.S. taxpayers holding certain financial assets outside the United States must determine and report the FMV of these assets annually to the Internal Revenue Service as part of their tax filings.

Identifying Specified Foreign Financial Assets

The requirement to report foreign assets to the IRS applies to those classified as “specified foreign financial assets.” Reporting is done on Form 8938, Statement of Specified Foreign Financial Assets, which is attached to a taxpayer’s annual income tax return.

Assets held for investment must be reported. These include:

• Financial accounts maintained by a foreign financial institution.
• Stocks or securities issued by a non-U.S. person.
• An interest in a foreign entity, such as a corporation or partnership.
• A financial contract with a foreign counterparty.
• An interest in a foreign estate, trust, or pension plan.

Conversely, assets not held for investment are excluded. This means personal property held directly, such as art or cars, does not need to be reported on Form 8938. Real estate owned directly and foreign currency or precious metals held directly are also excluded from this reporting requirement.

General Valuation and Currency Conversion Rules

The IRS requires the asset’s fair market value on the final day of the tax year, which for most individuals is December 31. This year-end value is what is reported for each specific asset on Form 8938.

A separate calculation is needed to determine if a taxpayer meets the filing threshold. A single individual living in the U.S., for instance, must file if the total value of their specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any point during the year. These thresholds are higher for married couples and for taxpayers residing abroad.

All reported values must be in U.S. dollars. Taxpayers must convert amounts from a foreign currency using a consistent exchange rate. The primary source is the year-end exchange rate published by the U.S. Treasury Department’s Bureau of the Fiscal Service. If a rate is not available from this source, another publicly available rate may be used, but its source must be identified on the form.

Determining FMV for Different Asset Types

The method for determining an asset’s fair market value depends on its type.

Financial Accounts

For financial accounts, such as those at foreign banks or brokerage firms, the FMV is simply the value reported on the periodic account statements. The year-end statement will provide the value as of the last day of the tax year. If a statement does not provide a year-end value, the last reported value for that year should be used.

Publicly Traded Stock

The FMV of publicly traded foreign stock is its published price on the stock’s principal exchange on the last business day of the tax year. If there were no sales on that day, an average of the bid and ask prices at the close of business can be used as a reasonable estimate.

Non-Publicly Traded Stock/Interests in Private Entities

Valuing an interest in a privately held foreign company can be challenging. Taxpayers are permitted to make a good-faith estimate of the FMV and must be prepared to explain the method used. A common starting point is the entity’s balance sheet, using the book value of the taxpayer’s interest as a proxy, though this may not fully capture the true market value.

Interests in Foreign Trusts or Estates

For an interest in a foreign trust or estate, the value is the amount reported to the beneficiary by the trustee or executor. If this information is not provided, the taxpayer must make a reasonable estimate. The value reported should be the FMV of the beneficiary’s specific interest in the entity’s assets, not the total value of the entire trust or estate.

Assets with No Readily Available Value

In some cases, a value may be genuinely difficult to obtain, such as with certain foreign pension plans or deferred compensation plans. Reporting a value of $0 is only acceptable if the asset is truly worthless. If a value cannot be determined but the asset is not worthless, a reasonable estimation process is still required. The IRS instructions for Form 8938 clarify that if the maximum value during the year is unknown but is reasonably believed to be above the reporting threshold, the taxpayer must still file the form and provide the best possible estimate for the year-end value.