There is confusion over whether or not a 'demat account' needs to be reported on a report of foreign bank account (FBAR) form.
What is a 'demat account'?
In a 'demat account', shares and securities are held electronically instead of the investor taking physical possession of certificates. A demat account is opened by the investor while registering with an investment broker (or sub-broker). The demat account number is quoted for all transactions to enable electronic settlements of trades to take place. Access to the demat account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the demat account are automatically made once transactions are confirmed and completed.
A 'demat account' is a foreign account for purposes of the FBAR.
There is some confusion as to whether demat accounts need to be reported on FBAR returns. Recently, we came across the issue of whether stocks held in a dematerialized account needed to be reported on FBAR returns. Many taxpayers erroneously believe that since individual stock certificates held by taxpayers need not be reported as financial accounts, then 'demat accounts' need not be reported. This is not correct. Though a demat account is essentially electronic storage for stock certificates enabling investors to own certificates without having to take physical possession of the certificates, the IRS is explicit with its view that a financial account is any account that holds securities, securities derivatives, or other financial instruments. See Internal Revenue Manual (I.R.M.) 184.108.40.206.2.1.B (07-01-2008).
A 'demat account' is a type of securities account
The disadvantage of 'demat accounts': Onerous accounting
The problem for taxpayers arises when they are required to report account values on their FBAR returns and to report capital gains, and passive income via dividends from these accounts on their income tax returns. Whereas traditional brokerage accounts provide investors with monthly statements that indicate values, interest, and dividends, demats provide no such information and can become a headache for taxpayers to discover and many hours for accountants to compile, especially for those coming clean under the FBAR amnesty or the Offshore Voluntary Disclosure Program (OVDP).
If you're concerned that you have unfiled or misfiled FBARs, contact us for a free consultation.