IRS rules on currency exchange

[Stuck@Cedar]

Maybe I have missed it since I haven't read every post on this site, but I have not read any post that gives what the IRS rules are on paying taxes when we exchange our Dinar back to Dollars. I have read numerous postings on this site in the time I have been on that state "what the rules are", but without an IRS reference I take them with a grain of salt. I have seen and heard "my accountant told me..." but I have heard numerous things from accountants and even IRS employees that were wrong. Being a person that wants to see it in the rules, I have finally found a reference. I contacted the IRS and here was their response:



Your Question Was:
If I have foreign currency in a safety deposit box, an account in a foreign bank or a foreign currency account in a US bank (such as at EverBank), where does the tax code cover tax due on the appreciation of the value of the currency due to the change in exchange rates? I understand that I would owe tax on the US equivalence of any and all interest paid to an account using the exchange rate of the date the interest was paid into the account. I have not, however, been able to locate anywhere in the tax code that covers whether or not any tax is owed on the difference between the amount paid (in US currency) when exchanged for a foreign currency and the amount received (in US currency) when the foreign currency is exchanged back. Could you please shed a little light as to where I should look to find this information? I have been told numerous things on this, but nobody has been able to cite anywhere in the tax law that supports their version.


The Answer To Your Question Is:
Thank you for your inquiry. We are answering your question based on the assumption that you are a U.S. citizen or resident. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200.00. If the gain is more than $200.00, report it as a capital gain. Capital gains are reported on Schedule D, Capital Gains and Losses, and line 13 of the Form 1040, U.S. Individual Income Tax Return (2005). For more information, please refer to Publication 525, Taxable and Nontaxable Income. Thank you for using this service.


The reference can be located at http://www.irs.gov/pub/irs-pdf/p525.pdf (http://www.irs.gov/pub/irs-pdf/p525.pdf), the 2007 issue of Taxable and Nontaxable Income, on page 30:

Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.

I just received this response yesterday. I do not know why their answer included "(2005)" unless this was a response that was written in 2005 or early 2006 and has been put in their list of standard responses without any update. It also does not give any indication that it can be classified as a long term capitol gain. If anyone finds anything else - with reference - please let me know.

[Sponson]

Thanks for taking the time to do this Stuck.

:nerd:

From threads in the past, personal conversations, and the IRS website and publications (as you pointed out), I'd pretty much come to the same conclusion: it's a Capital Gain.

I hope everyone's keeping their receipts.

:cash:

[Sponson]

What I am curious about is how this applies to stock bought through Warka?

Does the LTCGs start only from when you bought the currency, or does it start all over again when you buy the stock?

:thinking:

[if i was a rich man]

Right now I believe long term capital gain is 15%. But Barack Obama wants to change it to 28%.

[mailman17]

Thanks for taking the time to do this Stuck.

:nerd:

From threads in the past, personal conversations, and the IRS website and publications (as you pointed out), I'd pretty much come to the same conclusion: it's a Capital Gain.

I hope everyone's keeping their receipts.

:cash:
Spons,

Reciepts really dont matter. If this thing hits to say 1-1. then cashing in what you bought for 700-1000 bucks for 1 million dollars really doesnt effect the capital Gains. Instead of paying Capital gains on 1 mill, you would pay it on 999,300. Not much difference. know what I mean? about the only difference is if you bought it more than a year ago ( with reciepts-15%/without reciepts-20%) or less than a year- 20% flat out....sure beats paying 35% being based as income as we all thought.

[Katt]

I wouldn't accept this thread as the last IRS word.

Katt :drink:

[Deer Hunter]

Maybe I have missed it since I haven't read every post on this site, but I have not read any post that gives what the IRS rules are on paying taxes when we exchange our Dinar back to Dollars. I have read numerous postings on this site in the time I have been on that state "what the rules are", but without an IRS reference I take them with a grain of salt. I have seen and heard "my accountant told me..." but I have heard numerous things from accountants and even IRS employees that were wrong. Being a person that wants to see it in the rules, I have finally found a reference. I contacted the IRS and here was their response:



The reference can be located at http://www.irs.gov/pub/irs-pdf/p525.pdf (http://www.irs.gov/pub/irs-pdf/p525.pdf), the 2007 issue of Taxable and Nontaxable Income, on page 30:

Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.

I just received this response yesterday. I do not know why their answer included "(2005)" unless this was a response that was written in 2005 or early 2006 and has been put in their list of standard responses without any update. It also does not give any indication that it can be classified as a long term capitol gain. If anyone finds anything else - with reference - please let me know.
This does not sound like AN OFFICIAL RULING on anything. It is just somebodies guess as to what THEY HAPPEN TO THINK. If it was for real it would be much more definitive, exact, documented, AND at least explain IF IT IS Long Term or Short Term. IT REALLY DEALS with one little issue that someone thought about and that has something to do with travelers + or - $200. What happens if you lose money? Lots of questions ignored and not answered so TO ME it is pretty much in that 50/50 error ratio of IRS.

[SuperMario]

I am not so sure the person who gave you this information is correct. I checked with IRS on this subject about 6 months ago. I was on the phone with them for over an hour. I do not have the section information that they sent to me any longer. But in a nut shell this is what was conveyed:

*Currency has never been and is still not considered a long or short term investment. Any money made through speculation is considered income and will be taxed as such.

So basically 35% tax.
__________________________________________________ ______________

Anyway right or wrong, make sure you have the correct info when you file or you may end up with a tax headache.

Anyway for me it would be a great problem to have as it would mean one way or the other I would be in the money.:rofl:

[IITB]

New investors will get hit harder than we old-timers , but it is not considered income by any stretch of the imagination. :rofl:
I don't follow your logic Mario
However I really liked the way you jumped over flaming barrels in the original donkey kong.....lol


http://www.irs.gov/newsroom/article/0,,id=106799,00.html

[dinar 4 2]

I am not so sure the person who gave you this information is correct. I checked with IRS on this subject about 6 months ago. I was on the phone with them for over an hour. I do not have the section information that they sent to me any longer. But in a nut shell this is what was conveyed:

*Currency has never been and is still not considered a long or short term investment. Any money made through speculation is considered income and will be taxed as such.

So basically 35% tax.
__________________________________________________ ______________

Anyway right or wrong, make sure you have the correct info when you file or you may end up with a tax headache.

Anyway for me it would be a great problem to have as it would mean one way or the other I would be in the money.:rofl:
Thanks SM.
I have a question, did you get anything in writing?
Evidently, IRS sent S@C written communication with answer and referenced a specific IRS publication.

[blue99]

i want the code.....
i want the code.....
gimme the irs tax code or im not paying...

[taro patch II]

I too asked the IRS, about six times to different departments. They told me currency is not treated as a taxable gain, any interest is that is earned on it yes, but not we consider a gain like a stock or an asset. Unless you trade as a futures business. Currency is not an investment, it is an exchange of currency, not the sale of anything. It is not a taxable event. This is after speaking with the schedule D folks, the capital gains folks, and the complex individuals issues. I wasn't sure I still believed them, so I asked for a code that would be definitive. No one had one, because it wasn't considered a gain, as we might expect, there was no code. In the end, though, they recommended speaking with a tax attourney. Apparently, what the IRS tells you may not be the final ruling, as they are not responsible, should the information they give you be incorrect. Go figure.:surprised:

[REITman]

Here's a recent and interesting email I received. If any of you remember WmKnowles this is his recent conversation with the IRS.

I spent some time on the phone with the IRS the other day, spoke with the "Complex tax law" extension that handles foreign currency, they said no tax due as capital gain, interest earned would be, but not the conversion. Then spoke with the "schedule D" extension that handles capital gains, their publication 525 does not deal with conversions of currency, and was quoted that this is not an investment, and that currency is valued differently than stocks or bonds, so long as you are not in the currency futures business, private funds held in cash or currency is not the sale "of anything," only an exchange of currency. I then asked for a ruling, or code that I could quote if I should need to defend my position and was then transfered to the "complex individual issues" department. I was agian told that there was nothing in the code that says an exchange of currency is a capital gains, again so long as you are not a proffessional currency trader. It is not a capital gain because it is not the sale of anything. Currency exchange is treated as an exchange and not the sale of an assett.

They all told me the same thing.

I should note that you should do your own due diligence, that the above may be entirely incorrect.

I did present the situation as that I had been holding Euro for over 5 years.
Didn't get into the Dinar. I plan on taking this up on my next 2 hour phone call to the IRS. I will post if anything other outcome is presented.



I have not read any post that gives what the IRS rules are on paying taxes when we exchange our Dinar back to Dollars.

Amazing! Then you need to learn how to use the search feature. Tax threads are numerous and lengthy. Mostly from 2006 when everyone thought the RV was imminent. :giggle:

[RoyalNorthBeach]

Early last year on here, someone posted a link with a new law our government had just passed on Dec. 1, 2007. From what I remember, it stated that all gains on currency as of 2008 was to be taxed as ordinary income. So it didn't matter how long you held the dinars (the 1 year/1 day). I thought it was a good sign that they knew what was coming and wanted their 35%. Is someone good out there that could try and find that posting?

[Howler]

Be smart. When the time comes to cash in, pay the $100 or $150 and set up a consultation with a tax lawyer.

****yawn****



I couldnt agree more!

Saving a couple hundred bucks trying to do it yourself, just doesnt make sense. Put someone elses name on that responsibility line.

[Stuck@Cedar]

Here's a recent and interesting email I received. If any of you remember WmKnowles this is his recent conversation with the IRS.

I spent some time on the phone with the IRS the other day, spoke with the "Complex tax law" extension that handles foreign currency, they said no tax due as capital gain, interest earned would be, but not the conversion. Then spoke with the "schedule D" extension that handles capital gains, their publication 525 does not deal with conversions of currency, and was quoted that this is not an investment, and that currency is valued differently than stocks or bonds, so long as you are not in the currency futures business, private funds held in cash or currency is not the sale "of anything," only an exchange of currency. I then asked for a ruling, or code that I could quote if I should need to defend my position and was then transfered to the "complex individual issues" department. I was agian told that there was nothing in the code that says an exchange of currency is a capital gains, again so long as you are not a proffessional currency trader. It is not a capital gain because it is not the sale of anything. Currency exchange is treated as an exchange and not the sale of an assett.

They all told me the same thing.

I should note that you should do your own due diligence, that the above may be entirely incorrect.

I did present the situation as that I had been holding Euro for over 5 years.
Didn't get into the Dinar. I plan on taking this up on my next 2 hour phone call to the IRS. I will post if anything other outcome is presented.




Amazing! Then you need to learn how to use the search feature. Tax threads are numerous and lengthy. Mostly from 2006 when everyone thought the RV was imminent. :giggle:

Gee REITman, maybe you should learn to read and/or comprehend someone’s post before you start commenting on it! :tongueout:

If you had read the entire comment instead of taking part of it out of context, you would have realized that I covered the post by WM Knowles. You seem to have missed the following parts of my post that are in red “Maybe I have missed it since I haven't read every post on this site, but I have not read any post that gives what the IRS rules are on paying taxes when we exchange our Dinar back to Dollars. I have read numerous postings on this site in the time I have been on that state "what the rules are", but without an IRS reference I take them with a grain of salt. I have seen and heard "my accountant told me..." but I have heard numerous things from accountants and even IRS employees that were wrong.”

Yes, I had read the post by WM Knowles a good while back… but it does not conflict with my statement. As I indicated, I was looking for posts that had an IRS reference – his post did not have one. A statement from an IRS agent is not what I am referring to as an IRS reference. If an IRS agent gives incorrect information and it causes your taxes to be wrong, it is still your fault. His post said that Publication 525 did not cover conversion of currency – it does cover currency conversion on page 30 as I stated in my post. The error was not his fault however; he just made the mistake of taking the word of an erroneous IRS agent without any document reference. Gee, that sounds familiar.

To his credit, WM Knowles did include the all important phrase of "I should note that you should do your own due diligence, that the above may be entirely incorrect."

The sole intent of my post was to give the other members of this forum at least one official reference of how the Dinar gains are taxed by the IRS…the only one I have found so far. Is this the final word? Probably not. I am not asking anyone to take my word about anything, I am just pointing out what the IRS documents say and they can interpret it for themselves. It will also let them be forewarned in case their accountant, or whoever else is doing their taxes, doesn’t know about this. Obviously some of the IRS agents don’t know about it.

As I previously stated, if anyone finds anything else - with reference - please let me know.

[v1rotv2]

Heres' the link:

http://www.irs.gov/pub/irs-pdf/p525.pdf

middle column just over halfway down.

[SuperMario]

New investors will get hit harder than we old-timers , but it is not considered income by any stretch of the imagination. :rofl:
I don't follow your logic Mario
However I really liked the way you jumped over flaming barrels in the original donkey kong.....lol


http://www.irs.gov/newsroom/article/0,,id=106799,00.html

First of all, this isn't my logic, it is only what was told to me after a lengthy phone call to the IRS and being transferred to 3 different people. It doesn't matter how IRS handles it if there should be an RV, as I would have a nice problem to deal with.

[tmorr37]

Here is something to keep in mind
holding currency in your hand is not the same as investing in currency
investing in currency involves buying on the (forex) market which is done with contracts.
They are 2 different scenarios. How the taxes work I don't know

Laws can change on the fly and if the Libs find out about the Iraq windfall Profits you will most likely loss more than half from your War Profits in the New laws they will write

[tmorr37]

Foreign currency transactions.
If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income 1unless it is more than $200. If the gain is more than $200, report it as a capital gain.

If it is in your hand there is no proof of a gain.
Did I buy it a yr ago or 10 min ago

[lglwzrd]

there will not be a tax code on something you dont owe taxes on. wm knowles due diligence on this point is a good example. i agree-show me the code where it says that an exchange of currency is income or a capital gain. funny thing-i cant find it. i will now spend $$ and assign this task to the greatest tax atty-mine. his answer will be THE answer.

[REITman]

there will not be a tax code on something you dont owe taxes on. wm knowles due diligence on this point is a good example. i agree-show me the code where it says that an exchange of currency is income or a capital gain. funny thing-i cant find it. i will now spend $$ and assign this task to the greatest tax atty-mine. his answer will be THE answer.

I was impressed with wm knowles' DD. I give more credence to a tax atty over a CPA. Looking forward to what your tax atty says lglwzrd. :yes:

[MonteandMe]

I was impressed with wm knowles' DD. I give more credence to a tax atty over a CPA. Looking forward to what your tax atty says lglwzrd. :yes:

Foreign currency transactions. If you have
a gain on a personal foreign currency transac-
tion because of changes in exchange rates, you
do not have to include that gain in your income
unless it is more than $200. If the gain is more
than $200, report it as a capital gain.

http://www.irs.gov/pub/irs-pdf/p525.pdf
Publication 525

[REITman]

Foreign currency transactions. If you have
a gain on a personal foreign currency transac-
tion because of changes in exchange rates, you
do not have to include that gain in your income
unless it is more than $200. If the gain is more
than $200, report it as a capital gain.

http://www.irs.gov/pub/irs-pdf/p525.pdf
Publication 525

That seems straight forward enough. I want to believe WmKnowles' info but how can someone dismiss what you just posted MM. :crying2:

[WCKDinar]

Here's a recent and interesting email I received. If any of you remember WmKnowles this is his recent conversation with the IRS.

I spent some time on the phone with the IRS the other day, spoke with the "Complex tax law" extension that handles foreign currency, they said no tax due as capital gain, interest earned would be, but not the conversion. Then spoke with the "schedule D" extension that handles capital gains, their publication 525 does not deal with conversions of currency, and was quoted that this is not an investment, and that currency is valued differently than stocks or bonds, so long as you are not in the currency futures business, private funds held in cash or currency is not the sale "of anything," only an exchange of currency. I then asked for a ruling, or code that I could quote if I should need to defend my position and was then transfered to the "complex individual issues" department. I was agian told that there was nothing in the code that says an exchange of currency is a capital gains, again so long as you are not a proffessional currency trader. It is not a capital gain because it is not the sale of anything. Currency exchange is treated as an exchange and not the sale of an assett.

They all told me the same thing.

I should note that you should do your own due diligence, that the above may be entirely incorrect.

I did present the situation as that I had been holding Euro for over 5 years.
Didn't get into the Dinar. I plan on taking this up on my next 2 hour phone call to the IRS. I will post if anything other outcome is presented.




Amazing! Then you need to learn how to use the search feature. Tax threads are numerous and lengthy. Mostly from 2006 when everyone thought the RV was imminent. :giggle:


My name is Wm. Knowles. I have NO knowledge of this information, did not have any conversation with the IRS and suspect someone is using my name for their own reasons. My CPI says there will be a capitol gains and will be taxed as such. Please discuss this issue with your own CPI and do not rely on these individuals who distort information and lie. Thank You.

[97ChameleonTA]

If it is in your hand there is no proof of a gain.
Did I buy it a yr ago or 10 min ago

This is a very valid point that I think a lot of you have overlooked. How does anyone, including the IRS, know what you paid for your Dinar?

And another good argument... If I lost money on the conversion do I get to write that off as a Capital Loss???

[Sponson]

This is a very valid point that I think a lot of you have overlooked. How does anyone, including the IRS, know what you paid for your Dinar?

And another good argument... If I lost money on the conversion do I get to write that off as a Capital Loss???

Because banks and dealers are supposed to keep records that the government can ask for. This is what I was told at Chase anyway. And who knows about eBay...

Capital loss? Sure. Why not?

:cash:

[creationworks]

This is a very valid point that I think a lot of you have overlooked. How does anyone, including the IRS, know what you paid for your Dinar?

And another good argument... If I lost money on the conversion do I get to write that off as a Capital Loss???


Ok, I'll weigh in on this...

As a currency trader it is my experience that the IRS will be VERY interested in where and when you attained your new found wealth. I might add to that the FBI and the DEA if you are less than forthcoming with your explaination.

All proceeds from your conversion will be required to be declared on the applicable tax return, Schedule D, short term or long term gains or losses. And yes if you convert your currency and suffer a loss you would be able to claim that as well. But in either case you will be required to show proof of your transactions if requested to do so. To think that this investment is somehow immune to the clutches of the IRS is naive at best.

Be prepared to pay Capital Gains taxes, but only on that portion of your holdings you convert to dollars. Profit or loss is not realized until you physically convert from one form to another.

JMO

[97ChameleonTA]

Thanks Sponson and CreationWorks...

I don't like your answers but at least it's an answer. :tongueout:

Much appreciated!

[DealOrBuyDinar]

Great post. Thanks for sharing the information.

As of Dec. 2007 gains on currency investments will be taxed as income, not as capital gains.



__________________________________________________ ____


IRS Ends Tax Advantage For Currency ETNs

December 11, 2007


The Internal Revenue Service has issued a ruling that ends the tax advantage that currency-based exchange-traded notes (ETNs) have over competing currency products, such as the CurrencyShares exchange-traded funds (ETFs) issued by Rydex Investments.
In fact, the new ruling puts the ETNs at a slight disadvantage for most investors.
This gets complicated if you haven't been following matters, so here is the Cliff's Notes of what happened.
Historically, currency investing has been very tax-inefficient. Investors in a currency-based product like Rydex's Euro Currency Trust ETF (FXE (http://seekingalpha.com/symbol/fxe)) have two sources of returns, and both receive terrible tax treatment:

Interest income: FXE literally holds euros in a bank in Europe, where they earn local interest rates. This interest income is paid out to investors quarterly as "ordinary income," subject to tax rates up to 35%.
Changes in the value of the currency: If the euro gains on the dollar, FXE goes up. When investors sells FXE—no matter how long they hold it—those gains are also taxed as ordinary income, with rates up to 35%. There is no possibility for gains to be taxed at the long-term capital gains tax rate of 15%, because the IRS does not consider currencies an "investment." Until today, the iPath currency ETNs had a huge advantage on the tax front.


First, rather than having the interest income paid out directly to shareholders, virtual interest income was accumulated into the price of the ETN itself. Investors didn't have to pay taxes on this income until they sold. Moreover, as long as they held the ETN for more than a year, this income would qualify as long-term capital gains, with tax rates of just 15%.
Second, the original iPath prospectus suggested that ETNs could be classified as "pre-paid contracts with respect to their indexes." Under that definition, any long-term gains from currency appreciation were taxed at the 15% long-term capital gains rate.
In other words, all gains could be deferred in the ETN and eventually taxed at 15%. In contrast, interest income in the ETFs was taxed immediately, and all gains of any kind were taxed at 35%.
It was a huge advantage.


The new ruling, however, throws all of that on its head. According to the new ruling, issued December 7, 2007, ETNs—along with any financial instrument linked to a single currency, regardless of whether that instrument is privately offered, publicly offered or traded on an exchange—should be treated as "debt" for federal tax purposes. This means that all gains—interest and otherwise—are taxable as ordinary income, with rates up to 35%. Moreover, shareholders will owe taxes each year on interest income even if that income is incorporated into the value of the note, as it is with ETNs. In other words, shareholders will have to pay taxes each year on interest, even though they won't realize that income until they sell the ETF.


In sum, currency ETNs have gone from having a huge tax advantage—with gains deferred and taxed at the 15% long-term rate—to a slight disadvantage, as investors now have to pay taxes out of pocket on interest they will not receive until they sell the fund.

Does Not Apply To Other ETNs ... Yet

Importantly, this ruling does not apply to other ETNs. In fact, the IRS has issued a request for comment on how taxes should be handled for other "prepaid forward contracts," such as the popular commodity ETNs.


What's interesting about this ruling, however, is that the IRS has taken the step of defining an entire class of investment (currencies) as subject to one type of taxation, rather than allowing different products to dodge or not dodge that tax treatment based on how they are structured.


In a sense, that's a victory for rationality and clarity.

http://www.soundmoneytips.com/article/56852-irs-ends-tax-advantage-for-currency-etns?source=mb

[DealOrBuyDinar]

If it is in your hand there is no proof of a gain.
Did I buy it a yr ago or 10 min ago

That logic might apply if the burden of proof fell on the IRS. It doesn't. When it comes to the IRS it's guilty until proven innocent. So they will be the one's asking you when you bought it. And they will ask you to prove it too.

[Daddy Needs Mils]

Great post. Thanks for sharing the information.

As of Dec. 2007 gains on currency investments will be taxed as income, not as capital gains.



__________________________________________________ ____


IRS Ends Tax Advantage For Currency ETNs

December 11, 2007


The Internal Revenue Service has issued a ruling that ends the tax advantage that currency-based exchange-traded notes (ETNs) have over competing currency products, such as the CurrencyShares exchange-traded funds (ETFs) issued by Rydex Investments.
In fact, the new ruling puts the ETNs at a slight disadvantage for most investors.
This gets complicated if you haven't been following matters, so here is the Cliff's Notes of what happened.
Historically, currency investing has been very tax-inefficient. Investors in a currency-based product like Rydex's Euro Currency Trust ETF (FXE (http://seekingalpha.com/symbol/fxe)) have two sources of returns, and both receive terrible tax treatment:

Interest income: FXE literally holds euros in a bank in Europe, where they earn local interest rates. This interest income is paid out to investors quarterly as "ordinary income," subject to tax rates up to 35%.
Changes in the value of the currency: If the euro gains on the dollar, FXE goes up. When investors sells FXE—no matter how long they hold it—those gains are also taxed as ordinary income, with rates up to 35%. There is no possibility for gains to be taxed at the long-term capital gains tax rate of 15%, because the IRS does not consider currencies an "investment."Until today, the iPath currency ETNs had a huge advantage on the tax front.


First, rather than having the interest income paid out directly to shareholders, virtual interest income was accumulated into the price of the ETN itself. Investors didn't have to pay taxes on this income until they sold. Moreover, as long as they held the ETN for more than a year, this income would qualify as long-term capital gains, with tax rates of just 15%.
Second, the original iPath prospectus suggested that ETNs could be classified as "pre-paid contracts with respect to their indexes." Under that definition, any long-term gains from currency appreciation were taxed at the 15% long-term capital gains rate.
In other words, all gains could be deferred in the ETN and eventually taxed at 15%. In contrast, interest income in the ETFs was taxed immediately, and all gains of any kind were taxed at 35%.
It was a huge advantage.


The new ruling, however, throws all of that on its head. According to the new ruling, issued December 7, 2007, ETNs—along with any financial instrument linked to a single currency, regardless of whether that instrument is privately offered, publicly offered or traded on an exchange—should be treated as "debt" for federal tax purposes. This means that all gains—interest and otherwise—are taxable as ordinary income, with rates up to 35%. Moreover, shareholders will owe taxes each year on interest income even if that income is incorporated into the value of the note, as it is with ETNs. In other words, shareholders will have to pay taxes each year on interest, even though they won't realize that income until they sell the ETF.


In sum, currency ETNs have gone from having a huge tax advantage—with gains deferred and taxed at the 15% long-term rate—to a slight disadvantage, as investors now have to pay taxes out of pocket on interest they will not receive until they sell the fund.

Does Not Apply To Other ETNs ... Yet

Importantly, this ruling does not apply to other ETNs. In fact, the IRS has issued a request for comment on how taxes should be handled for other "prepaid forward contracts," such as the popular commodity ETNs.


What's interesting about this ruling, however, is that the IRS has taken the step of defining an entire class of investment (currencies) as subject to one type of taxation, rather than allowing different products to dodge or not dodge that tax treatment based on how they are structured.


In a sense, that's a victory for rationality and clarity.

http://www.soundmoneytips.com/article/56852-irs-ends-tax-advantage-for-currency-etns?source=mb

My apologies in advance for a possibly stupid question.

What about setting up an offshore corp for our dinar?

[Hometown]

Finally, someone with the correct anwser!!! Whew, that was painful. Screaming Eagle is correct. The law has been changed from long term cap. gain tax (held over a year) or 15% to income tax of 50% (we will all be in that bracket). Hmmmmmm..................... wonder what the gov. thinks is coming to make such a change in tax law? No sense sweating it, just pay it and move on with what is left of your windfall. And for all of you who are planning on being tricky and not paying the IRS, good luck, hope you don't mind a 8x10 room with bars. :giggle: With technology the way it is you will not be getting away with much. Maybe if you are lucky they will just fine you and still make you pay your income taxes. :tmi:

Hometown out,










Great post. Thanks for sharing the information.

As of Dec. 2007 gains on currency investments will be taxed as income, not as capital gains.



__________________________________________________ ____


IRS Ends Tax Advantage For Currency ETNs

December 11, 2007


The Internal Revenue Service has issued a ruling that ends the tax advantage that currency-based exchange-traded notes (ETNs) have over competing currency products, such as the CurrencyShares exchange-traded funds (ETFs) issued by Rydex Investments.
In fact, the new ruling puts the ETNs at a slight disadvantage for most investors.
This gets complicated if you haven't been following matters, so here is the Cliff's Notes of what happened.
Historically, currency investing has been very tax-inefficient. Investors in a currency-based product like Rydex's Euro Currency Trust ETF (FXE (http://seekingalpha.com/symbol/fxe)) have two sources of returns, and both receive terrible tax treatment:

Interest income: FXE literally holds euros in a bank in Europe, where they earn local interest rates. This interest income is paid out to investors quarterly as "ordinary income," subject to tax rates up to 35%.
Changes in the value of the currency: If the euro gains on the dollar, FXE goes up. When investors sells FXE—no matter how long they hold it—those gains are also taxed as ordinary income, with rates up to 35%. There is no possibility for gains to be taxed at the long-term capital gains tax rate of 15%, because the IRS does not consider currencies an "investment." Until today, the iPath currency ETNs had a huge advantage on the tax front.


First, rather than having the interest income paid out directly to shareholders, virtual interest income was accumulated into the price of the ETN itself. Investors didn't have to pay taxes on this income until they sold. Moreover, as long as they held the ETN for more than a year, this income would qualify as long-term capital gains, with tax rates of just 15%.
Second, the original iPath prospectus suggested that ETNs could be classified as "pre-paid contracts with respect to their indexes." Under that definition, any long-term gains from currency appreciation were taxed at the 15% long-term capital gains rate.
In other words, all gains could be deferred in the ETN and eventually taxed at 15%. In contrast, interest income in the ETFs was taxed immediately, and all gains of any kind were taxed at 35%.
It was a huge advantage.


The new ruling, however, throws all of that on its head. According to the new ruling, issued December 7, 2007, ETNs—along with any financial instrument linked to a single currency, regardless of whether that instrument is privately offered, publicly offered or traded on an exchange—should be treated as "debt" for federal tax purposes. This means that all gains—interest and otherwise—are taxable as ordinary income, with rates up to 35%. Moreover, shareholders will owe taxes each year on interest income even if that income is incorporated into the value of the note, as it is with ETNs. In other words, shareholders will have to pay taxes each year on interest, even though they won't realize that income until they sell the ETF.


In sum, currency ETNs have gone from having a huge tax advantage—with gains deferred and taxed at the 15% long-term rate—to a slight disadvantage, as investors now have to pay taxes out of pocket on interest they will not receive until they sell the fund.

Does Not Apply To Other ETNs ... Yet

Importantly, this ruling does not apply to other ETNs. In fact, the IRS has issued a request for comment on how taxes should be handled for other "prepaid forward contracts," such as the popular commodity ETNs.


What's interesting about this ruling, however, is that the IRS has taken the step of defining an entire class of investment (currencies) as subject to one type of taxation, rather than allowing different products to dodge or not dodge that tax treatment based on how they are structured.


In a sense, that's a victory for rationality and clarity.

http://www.soundmoneytips.com/article/56852-irs-ends-tax-advantage-for-currency-etns?source=mb

[creationworks]

Great post. Thanks for sharing the information.

As of Dec. 2007 gains on currency investments will be taxed as income, not as capital gains.



__________________________________________________ ____


IRS Ends Tax Advantage For Currency ETNs

December 11, 2007


The Internal Revenue Service has issued a ruling that ends the tax advantage that currency-based exchange-traded notes (ETNs) have over competing currency products, such as the CurrencyShares exchange-traded funds (ETFs) issued by Rydex Investments.
In fact, the new ruling puts the ETNs at a slight disadvantage for most investors.
This gets complicated if you haven't been following matters, so here is the Cliff's Notes of what happened.
Historically, currency investing has been very tax-inefficient. Investors in a currency-based product like Rydex's Euro Currency Trust ETF (FXE (http://seekingalpha.com/symbol/fxe)) have two sources of returns, and both receive terrible tax treatment:

Interest income: FXE literally holds euros in a bank in Europe, where they earn local interest rates. This interest income is paid out to investors quarterly as "ordinary income," subject to tax rates up to 35%.
Changes in the value of the currency: If the euro gains on the dollar, FXE goes up. When investors sells FXE—no matter how long they hold it—those gains are also taxed as ordinary income, with rates up to 35%. There is no possibility for gains to be taxed at the long-term capital gains tax rate of 15%, because the IRS does not consider currencies an "investment."Until today, the iPath currency ETNs had a huge advantage on the tax front.


First, rather than having the interest income paid out directly to shareholders, virtual interest income was accumulated into the price of the ETN itself. Investors didn't have to pay taxes on this income until they sold. Moreover, as long as they held the ETN for more than a year, this income would qualify as long-term capital gains, with tax rates of just 15%.
Second, the original iPath prospectus suggested that ETNs could be classified as "pre-paid contracts with respect to their indexes." Under that definition, any long-term gains from currency appreciation were taxed at the 15% long-term capital gains rate.
In other words, all gains could be deferred in the ETN and eventually taxed at 15%. In contrast, interest income in the ETFs was taxed immediately, and all gains of any kind were taxed at 35%.
It was a huge advantage.


The new ruling, however, throws all of that on its head. According to the new ruling, issued December 7, 2007, ETNs—along with any financial instrument linked to a single currency, regardless of whether that instrument is privately offered, publicly offered or traded on an exchange—should be treated as "debt" for federal tax purposes. This means that all gains—interest and otherwise—are taxable as ordinary income, with rates up to 35%. Moreover, shareholders will owe taxes each year on interest income even if that income is incorporated into the value of the note, as it is with ETNs. In other words, shareholders will have to pay taxes each year on interest, even though they won't realize that income until they sell the ETF.


In sum, currency ETNs have gone from having a huge tax advantage—with gains deferred and taxed at the 15% long-term rate—to a slight disadvantage, as investors now have to pay taxes out of pocket on interest they will not receive until they sell the fund.

Does Not Apply To Other ETNs ... Yet

Importantly, this ruling does not apply to other ETNs. In fact, the IRS has issued a request for comment on how taxes should be handled for other "prepaid forward contracts," such as the popular commodity ETNs.


What's interesting about this ruling, however, is that the IRS has taken the step of defining an entire class of investment (currencies) as subject to one type of taxation, rather than allowing different products to dodge or not dodge that tax treatment based on how they are structured.


In a sense, that's a victory for rationality and clarity.

http://www.soundmoneytips.com/article/56852-irs-ends-tax-advantage-for-currency-etns?source=mb


That Sucks!!!

[Deer Hunter]

That Sucks!!!
I saw this one coming in some variation. That is why I plan to give "Dinars" directly to some charities and let the Tax-Ded Corp.'s cash it out. IF you do that MY UNDERSTANDING is that you can take a tax deduction equal to what 'they get out of it' against that much more that 'you cash in'. 50% was the Federal rule the last I checked. Individual states may vary their amounts and techniques.

In my state it is 9% on 'my half'. So that is only 4.5% overall. I THINK I would much rather do that than give 50% to tax men. Maybe you will have to think through that a bit, IF YOU ARE NOT SO INCLINED, but I usually give between 10 and 20% anyway.

It seems like a good deal TO ME and I THINK there will be so few figuring this out, or even doing it, IF THEY DO FIGURE IT OUT, that IRS will not mess with the charitable giving rules. IT IS TOO complicated and TOO MANY PEOPLE to deal with and upset for IRS to try.

It depends on what charity YOU WANT TO BENEFIT. Some would rather make the government THEIR CHARITY. As for me, I have two dozen on a list, pre-checked out, and familiar with their goals, missions, accountability, etc.
I even have them listed in OUR WILL in case my wife and I die before we can do it.

IF your focus is ALL ON YOU AND YOUR EARTHLY ENJOYMENT, then pay your taxes FIRST, because no matter what you get out of it, IT WILL SOON BE GONE. What you do not need is for too much be gone too quick and still owe a lot of taxes, when the tax man wakes you up, to put you back to sleep in a smaller bedroom.

[Esclade]

Hey, Hometown. The highest tax rate is currently 35% not 50%. But Obama will change that!!! :swear:

[DealOrBuyDinar]

That Sucks!!!

That pretty much sums it up.

[Daddy Needs Mils]

I saw this one coming in some variation. That is why I plan to give "Dinars" directly to some charities and let the Tax-Ded Corp.'s cash it out. IF you do that MY UNDERSTANDING is that you can take a tax deduction equal to what 'they get out of it' against that much more that 'you cash in'. 50% was the Federal rule the last I checked. Individual states may vary their amounts and techniques.

In my state it is 9% on 'my half'. So that is only 4.5% overall. I THINK I would much rather do that than give 50% to tax men. Maybe you will have to think through that a bit, IF YOU ARE NOT SO INCLINED, but I usually give between 10 and 20% anyway.

It seems like a good deal TO ME and I THINK there will be so few figuring this out, or even doing it, IF THEY DO FIGURE IT OUT, that IRS will not mess with the charitable giving rules. IT IS TOO complicated and TOO MANY PEOPLE to deal with and upset for IRS to try.

It depends on what charity YOU WANT TO BENEFIT. Some would rather make the government THEIR CHARITY. As for me, I have two dozen on a list, pre-checked out, and familiar with their goals, missions, accountability, etc.
I even have them listed in OUR WILL in case my wife and I die before we can do it.

IF your focus is ALL ON YOU AND YOUR EARTHLY ENJOYMENT, then pay your taxes FIRST, because no matter what you get out of it, IT WILL SOON BE GONE. What you do not need is for too much be gone too quick and still owe a lot of taxes, when the tax man wakes you up, to put you back to sleep in a smaller bedroom.

GREAT POINTER!!!

Remember, every dollar you willingly give the government, (state or federal) will go towards finding a way to take more from you. They are parasites of wealth.

[DealOrBuyDinar]

Hey, Hometown. The highest tax rate is currently 35% not 50%. But Obama will change that!!! :swear:

In case anyone overlooked it, this was a law passed by the Democratic held House and Senate at the end of 2007. Just a wee taste of what's to come.

Hard to believe that during a time when Americans are being hit with astronomical insurance premiums, gas prices, a decline in property value, a declining USD and inflation that these guys are going to raise taxes too. Good God, how much more can we handle. And why anyone would pick this time in history to raise taxes is beyond me. It makes zero economic sense.

And Democratic candidates are talking about raising taxes openly and getting a pass on it! Crazy. People just kind of glaze over and say, yeah but we hate Bush so do whatever as long as we "win". Think people. Think.

[boombatz]

When i bought my dinar I didn't buy an ETN

I wonder if that makes a difference?

[DealOrBuyDinar]

GREAT POINTER!!!

Remember, every dollar you willingly give the government, (state or federal) will go towards finding a way to take more from you. They are parasites of wealth.

Yup. If they can't handle the incredible wealth they have responsibly, why would anyone think that giving them more money is the solution??? I could see how giving them less might help reign in wasteful spending. But more? Talk about illogical.

[Deer Hunter]

Hey, Hometown. The highest tax rate is currently 35% not 50%. But Obama will change that!!! :swear:
Maybe IN YOUR STATE ESCLADE, BUT in Hometown's and mine we get hit with another 10% plus other cost for accounting. Round it off to 50% in your mind IN OUR STATES. Maybe we should consider moving TO YOUR STATE BEFORE we cash in. Then maybe 35% would do it.

Depends on how much you are going to be handling. State of residence when cashing 'IT IN' MIGHT JUST BE A 'BIG' FACTOR. Somebody please research and post a list of states with 'NO INCOME TAXES'. It might help some people.

[Esclade]

Maybe IN YOUR STATE ESCLADE, BUT in Hometown's and mine we get hit with another 10% plus other cost for accounting. Round it off to 50% in your mind IN OUR STATES. Maybe we should consider moving TO YOUR STATE BEFORE we cash in. Then maybe 35% would do it.

Depends on how much you are going to be handling. State of residence when cashing 'IT IN' MIGHT JUST BE A 'BIG' FACTOR. Somebody please research and post a list of states with 'NO INCOME TAXES'. It might help some people.

The Feds want 35%. Move to Alaska, Florida, Nevada, S. Dakota, Texas, Wyoming or Washington to pay no state income taxes.:clapping:

[albertaross70]

ok so what about putting in an offshore account...how could that effect the tax coade....

[taro patch II]

Great post. Thanks for sharing the information.

As of Dec. 2007 gains on currency investments will be taxed as income, not as capital gains.



__________________________________________________ ____


IRS Ends Tax Advantage For Currency ETNs

December 11, 2007


The Internal Revenue Service has issued a ruling that ends the tax advantage that currency-based exchange-traded notes (ETNs) have over competing currency products, such as the CurrencyShares exchange-traded funds (ETFs) issued by Rydex Investments.
In fact, the new ruling puts the ETNs at a slight disadvantage for most investors.
This gets complicated if you haven't been following matters, so here is the Cliff's Notes of what happened.
Historically, currency investing has been very tax-inefficient. Investors in a currency-based product like Rydex's Euro Currency Trust ETF (FXE (http://seekingalpha.com/symbol/fxe)) have two sources of returns, and both receive terrible tax treatment:

Interest income: FXE literally holds euros in a bank in Europe, where they earn local interest rates. This interest income is paid out to investors quarterly as "ordinary income," subject to tax rates up to 35%.
Changes in the value of the currency: If the euro gains on the dollar, FXE goes up. When investors sells FXE—no matter how long they hold it—those gains are also taxed as ordinary income, with rates up to 35%. There is no possibility for gains to be taxed at the long-term capital gains tax rate of 15%, because the IRS does not consider currencies an "investment."Until today, the iPath currency ETNs had a huge advantage on the tax front.


First, rather than having the interest income paid out directly to shareholders, virtual interest income was accumulated into the price of the ETN itself. Investors didn't have to pay taxes on this income until they sold. Moreover, as long as they held the ETN for more than a year, this income would qualify as long-term capital gains, with tax rates of just 15%.
Second, the original iPath prospectus suggested that ETNs could be classified as "pre-paid contracts with respect to their indexes." Under that definition, any long-term gains from currency appreciation were taxed at the 15% long-term capital gains rate.
In other words, all gains could be deferred in the ETN and eventually taxed at 15%. In contrast, interest income in the ETFs was taxed immediately, and all gains of any kind were taxed at 35%.
It was a huge advantage.


The new ruling, however, throws all of that on its head. According to the new ruling, issued December 7, 2007, ETNs—along with any financial instrument linked to a single currency, regardless of whether that instrument is privately offered, publicly offered or traded on an exchange—should be treated as "debt" for federal tax purposes. This means that all gains—interest and otherwise—are taxable as ordinary income, with rates up to 35%. Moreover, shareholders will owe taxes each year on interest income even if that income is incorporated into the value of the note, as it is with ETNs. In other words, shareholders will have to pay taxes each year on interest, even though they won't realize that income until they sell the ETF.


In sum, currency ETNs have gone from having a huge tax advantage—with gains deferred and taxed at the 15% long-term rate—to a slight disadvantage, as investors now have to pay taxes out of pocket on interest they will not receive until they sell the fund.

Does Not Apply To Other ETNs ... Yet

Importantly, this ruling does not apply to other ETNs. In fact, the IRS has issued a request for comment on how taxes should be handled for other "prepaid forward contracts," such as the popular commodity ETNs.


What's interesting about this ruling, however, is that the IRS has taken the step of defining an entire class of investment (currencies) as subject to one type of taxation, rather than allowing different products to dodge or not dodge that tax treatment based on how they are structured.


In a sense, that's a victory for rationality and clarity.

http://www.soundmoneytips.com/article/56852-irs-ends-tax-advantage-for-currency-etns?source=mb



This is relative to buying futures contracts on the foreign exchange. This is a purchase of a derivative and any gains and losses would be considered the result of an investment.

Exchanging dinar for dollar is an exchange, not a purchase, or sale of an investment.

This is different than a like for like exchange, which had been presented by the IRS as a non taxable event. Any interest earned on your holding dinars in a bank would be considered a gain and must be reported as such.

If anyone can support that a dollar for dinar exchange, not one involving the purchase or sale of a futures contract, is a taxable event, then please let us know.

I am not a tax attourney, and will certainly employ one when the time is right, but for discussion purposes, the IRS does not recognize the exchange as taxable. The moneys had been taxed and were merely held in a like for like exchange of currency.

Lets say for instance the dollar increases in value, or more realistically, the dollar loses value as you hold it your non interest bearing bank account, or under your pillow for that matter. I believe the dollar is down around 8% so far this year. Are you going to tell me that I can right off that loss in value relative to another currency? I don't think so.

[REITman]

My name is Wm. Knowles. I have NO knowledge of this information, did not have any conversation with the IRS and suspect someone is using my name for their own reasons. My CPI says there will be a capitol gains and will be taxed as such. Please discuss this issue with your own CPI and do not rely on these individuals who distort information and lie. Thank You.

WOW! I got that information about the call to the IRS from a reliable source. I'll let him know he received bogus info. Sorry Wm. Knowles I thought it was legitimate.

[v1rotv2]

WOW! I got that information about the call to the IRS from a reliable source. I'll let him know he received bogus info. Sorry Wm. Knowles I thought it was legitimate.

IRS Pub. 525, page 30, middle column just over halfway down. It states the following.

Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.

Seems to be pretty clear to me.

[IraqiFreedom]

That seems straight forward enough. I want to believe WmKnowles' info but how can someone dismiss what you just posted MM. :crying2:
Unless WmKnowles actually was provided the written ruling for which he asked, the information means nothing. (Edit: saw that WmKnowles did not provide the information attributed to him, but the issue is the same regardless), The IRS call center gives out the wrong answer about 50% of the time and you are still held responsible for their error. Go with Pub 525 unless you have other written info from the IRS. It would be difficult for the IRS to find against you if you followed the exact language of their published documents.

That said, the published docs are only interpretations of the actual code. In and of themselves they mean nothing, except that the typically are written based on some precedent.


The more interesting question is regarding the purchase of stock with dinar.

The haziness is when you actually buy dinar denominated asset with your dinar. This creates a situation that I do not believe is covered in the code, a possible loophole.

You have to create income to pay an income tax. There are two possible areas of taxation that I see.

First as per Pub 525, a gain from changes in exchange rates. So pub 525 handles converting dinar to dollars or any other currency, as any gain is based on the value in US dollars at the time of exchange, regardless of the currency.

The next area is capital gains, if foreign currency is treated as a capital asset. I think that the IRS has argued both sides of this coin. They say in some instances it is not a capital asset and sometimes it is (pub 525) at their convenience. Not going to argue that the tax code is fair or sane.

So, where does this leave us. Let's look at the ISX example. Did we create a pub 525 pseudo capital gain from changes in exchange rates? I think that the answer is no because, not only have we not converted to a different currency to recognize a gain, but we have purchased a dinar denominated asset. No tax due yet.

Did we recognize a capital gain. For the sake of argument, let's say that currency may be a capital asset. If indeed currency is a capital asset, the code clearly indicates that you must recognize a capital gain based on the difference between the disposition value and acquisition value of the asset at its value in dollars at both acquisition and disposition. So if you hold dinar with an acquisition value of $1,000 and then you exchange it for any other asset worth, for example, $10,000, you must recognize a $9,000 gain. So whether you will incur tax if dinar is considered a capital asset.

So pub 525 and the capital gain rules put us in the same place with regard to taxes due despite the application of different paths to get there.

The question is, when does capital asset status apply to our dinar? We know that it can apply in the case of a pub 525 exchange, but we have ruled that out in the case of an ISX purchase. So only true capital gains rules apply.

Now we need to take a practical look at foreign currency. If I convert dollars to Yen and then travel to Japan, I'll spend yen on hotels, gifts, clothing, food, etc. Let's say that I spend $15,000 in Japan. If I have some yen left over when I return and exchange that yen for dollars, I will recognize a capital gain if the increase in value due to exchange rates is greater than $200. Even though the increased value of the yen applied to the yen I spent in Japan, I am only taxed on the leftover yen that I exchange into dollars. This means that any yen denominated purchases were NOT taxable. Similarly, we are not obligated to record a capital gain on the dinar spent under the capital gains section of the code. This leads me to the conclusion that capital asset status does not apply to foreign currency spent on items denominated in the same foreign currency.

Back to the ISX. If you were purchasing a Non Iraqi asset, the tax treatment is clear, but since you are buying a dinar denominated item with dinar, it is questionable whether any income is created on the conversion of dinar to ISX securities even if the your dinar holdings may have appreciated prior to purchasing your ISX securities. Of course capital asset status clearly applies to the securities that you purchased. So, when you sell your securities, you will have a gain or loss based on the value in dollars at time of sale - value in dollars at the time of purchase.

Here is where it gets very interesting. If you accept the above arguments, then there is no tax on your dinar when making an ISX purchase. In the course of most current ISX trading, this is of little consequence because the acquisition value of your securities are based on the current dinar-usd exchange rate. But let's look to the future...

Let's say that the dinar does reval. At this point you have appreciated dinar. If you purchase a non dinar denominated asset, you will owe capital gains tax, regardless if you use the traditional capital asset rules or pub 525 to get there. But, if you purchase ISX stocks, a building in Iraq, or another dinar denominated asset, you have no gain. Furthermore, your acquisition value for the dinar denominated asset is based on the value of the dinar at the time of purchase and not the acquisition value of your dinar. You could effectively use your dinar to purchase ISX stock and then sell the stock the next day (probably at about the same stock price). You just avoided tax on any reval!

This is only my understanding of the code. Please consult a tax professional before making any tax decisions. I make no claim as to the correctness of this information.

[taro patch II]

IRS Pub. 525, page 30, middle column just over halfway down. It states the following.

Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.

Seems to be pretty clear to me.


Thank you for the clarification. I think that clearly puts it in the capital gains
column. Good work.

[creationworks]

Unless WmKnowles actually was provided the written ruling for which he asked, the information means nothing. (Edit: saw that WmKnowles did not provide the information attributed to him, but the issue is the same regardless), The IRS call center gives out the wrong answer about 50% of the time and you are still held responsible for their error. Go with Pub 525 unless you have other written info from the IRS. It would be difficult for the IRS to find against you if you followed the exact language of their published documents.

That said, the published docs are only interpretations of the actual code. In and of themselves they mean nothing, except that the typically are written based on some precedent.


The more interesting question is regarding the purchase of stock with dinar.

The haziness is when you actually buy dinar denominated asset with your dinar. This creates a situation that I do not believe is covered in the code, a possible loophole.

You have to create income to pay an income tax. There are two possible areas of taxation that I see.

First as per Pub 525, a gain from changes in exchange rates. So pub 525 handles converting dinar to dollars or any other currency, as any gain is based on the value in US dollars at the time of exchange, regardless of the currency.

The next area is capital gains, if foreign currency is treated as a capital asset. I think that the IRS has argued both sides of this coin. They say in some instances it is not a capital asset and sometimes it is (pub 525) at their convenience. Not going to argue that the tax code is fair or sane.

So, where does this leave us. Let's look at the ISX example. Did we create a pub 525 pseudo capital gain from changes in exchange rates? I think that the answer is no because, not only have we not converted to a different currency to recognize a gain, but we have purchased a dinar denominated asset. No tax due yet.

Did we recognize a capital gain. For the sake of argument, let's say that currency may be a capital asset. If indeed currency is a capital asset, the code clearly indicates that you must recognize a capital gain based on the difference between the disposition value and acquisition value of the asset at its value in dollars at both acquisition and disposition. So if you hold dinar with an acquisition value of $1,000 and then you exchange it for any other asset worth, for example, $10,000, you must recognize a $9,000 gain. So whether you will incur tax if dinar is considered a capital asset.

So pub 525 and the capital gain rules put us in the same place with regard to taxes due despite the application of different paths to get there.

The question is, when does capital asset status apply to our dinar? We know that it can apply in the case of a pub 525 exchange, but we have ruled that out in the case of an ISX purchase. So only true capital gains rules apply.

Now we need to take a practical look at foreign currency. If I convert dollars to Yen and then travel to Japan, I'll spend yen on hotels, gifts, clothing, food, etc. Let's say that I spend $15,000 in Japan. If I have some yen left over when I return and exchange that yen for dollars, I will recognize a capital gain if the increase in value due to exchange rates is greater than $200. Even though the increased value of the yen applied to the yen I spent in Japan, I am only taxed on the leftover yen that I exchange into dollars. This means that any yen denominated purchases were NOT taxable. Similarly, we are not obligated to record a capital gain on the dinar spent under the capital gains section of the code. This leads me to the conclusion that capital asset status does not apply to foreign currency spent on items denominated in the same foreign currency.

Back to the ISX. If you were purchasing a Non Iraqi asset, the tax treatment is clear, but since you are buying a dinar denominated item with dinar, it is questionable whether any income is created on the conversion of dinar to ISX securities even if the your dinar holdings may have appreciated prior to purchasing your ISX securities. Of course capital asset status clearly applies to the securities that you purchased. So, when you sell your securities, you will have a gain or loss based on the value in dollars at time of sale - value in dollars at the time of purchase.

Here is where it gets very interesting. If you accept the above arguments, then there is no tax on your dinar when making an ISX purchase. In the course of most current ISX trading, this is of little consequence because the acquisition value of your securities are based on the current dinar-usd exchange rate. But let's look to the future...

Let's say that the dinar does reval. At this point you have appreciated dinar. If you purchase a non dinar denominated asset, you will owe capital gains tax, regardless if you use the traditional capital asset rules or pub 525 to get there. But, if you purchase ISX stocks, a building in Iraq, or another dinar denominated asset, you have no gain. Furthermore, your acquisition value for the dinar denominated asset is based on the value of the dinar at the time of purchase and not the acquisition value of your dinar. You could effectively use your dinar to purchase ISX stock and then sell the stock the next day (probably at about the same stock price). You just avoided tax on any reval!

This is only my understanding of the code. Please consult a tax professional before making any tax decisions. I make no claim as to the correctness of this information.


Very interesting concept. Thanks for your input on this.

[papajack]

I have asked my accountant and his opinion is that an RV will be taxed as capital gains and the rate would be 35% plus State. My only hope is that an RV will occur before there is a chance that the Democrats would get any more control than they have now, if they win the election America as we know it will cease to exist and we are in trouble.

[axvester]

I have asked my accountant and his opinion is that an RV will be taxed as capital gains and the rate would be 35% plus State. My only hope is that an RV will occur before there is a chance that the Democrats would get any more control than they have now, if they win the election America as we know it will cease to exist and we are in trouble.Round and round:drunk2:
So If I Loose My Arse In This Currency Exchang It's A Capital Loss!

I Will Write Off Any Capital Loss Over $200.00 Because I'm Exchanging Currency!:sleepy:

If We Are Taxed, They Are Stealing Our Money!:punch:

[COACH JACK]

Ok, I'll weigh in on this...

As a currency trader it is my experience that the IRS will be VERY interested in where and when you attained your new found wealth. I might add to that the FBI and the DEA if you are less than forthcoming with your explaination.

All proceeds from your conversion will be required to be declared on the applicable tax return, Schedule D, short term or long term gains or losses. And yes if you convert your currency and suffer a loss you would be able to claim that as well. But in either case you will be required to show proof of your transactions if requested to do so. To think that this investment is somehow immune to the clutches of the IRS is naive at best.

Be prepared to pay Capital Gains taxes, but only on that portion of your holdings you convert to dollars. Profit or loss is not realized until you physically convert from one form to another.

JMO
Good sense & rational thought agrees with you. Our government will get their fair share. Let there be no doubt!!

[COACH JACK]

In case anyone overlooked it, this was a law passed by the Democratic held House and Senate at the end of 2007. Just a wee taste of what's to come.

Hard to believe that during a time when Americans are being hit with astronomical insurance premiums, gas prices, a decline in property value, a declining USD and inflation that these guys are going to raise taxes too. Good God, how much more can we handle. And why anyone would pick this time in history to raise taxes is beyond me. It makes zero economic sense.

And Democratic candidates are talking about raising taxes openly and getting a pass on it! Crazy. People just kind of glaze over and say, yeah but we hate Bush so do whatever as long as we "win". Think people. Think.
I just showed my wife, who pays the bills in our house, your post. She responded your comments are so true and just what in the hell are people thinking; elect someone who will only exascerbate the current conditions? We agree; Think, people, think!!

[guardian]

I'm sure the IRS will make it "very clear" when the dinar revalues what they want. That's for sure. Watch Out! Now Barack Obama says he wants to perhaps nearly double the capital gains tax rate.

[cruzinwithHank]

If you have dinar in hand... then Quietly take the dinar to a bank in the Cayman Islands and open up a "Dinar" account. This is when YOU actually "redeem" the money. Think about this; when US citizens works OUTSIDE the US, their income is NOT taxable. Most politicians and Gov't leaders in this country have bank accts in the Caribbean... WHY? because they escape taxes (legally). Keep in mind that you WILL have to file the appropriate paperwork showing an offshore acct, but that's only to show our Gov't law enforcement officials that you are not terrorists and that you are not "laundering" money for them. There are several banks in the Caymans to choose from.. Google banks in the Caymans and choose your own. It's also worth making a phone call to them and get the details on how to set up the account. One last recommendation.... when the dinar revalues, "charter" and aircraft... don't go commercially.... You leave the US without the B.S. from customs and the Cayman officials always welcomes your money with open arms!!

[cruzinwithHank]

NO TAXES!!!... If you take your dinar to a Cayman bank and set up a "Dinar" bank account.... Why do you think most of our politicians, (who by the way are the best that "money can buy"), have Cayman bank accounts.. I know because of a very close family member is a retired member of congress... Some of the crap I've learned from him would curl your toes back.... Anyway... take your money "OUTSIDE" the US to redeem... this is the secret to escaping taxes LEGALLY!!!
Wishing all of you much wealth & success.

[axvester]

I'm sure the IRS will make it "very clear" when the dinar revalues what they want. That's for sure. Watch Out! Now Barack Obama says he wants to perhaps nearly double the capital gains tax rate.Sorry, don't see any tax on currency exchange at all! Just makes no sense at all. Do you actually think that if your sitting on 1 trillion Iraq Dinar and all the sudden the exchange rate fell 50% and you cashed in at a huge loss you would get to write off your loss with the IRS? It just does not make any sense to me! NO TAX!!!:rock: No Capital Gain Either!!!:rock:

[Sandman80]

I would have to say that all the years that I have traveled this world, not one time that I have brought home over 1 thousand euro, have I ever had to pay any kind of tax for exchanging it. I can however, see how a person that is trading it on the Forex, would be taxed.

[johnruseckas]

Nowhere in the above discussion does it seem to be recognized that the IRS doesn't have to be, and isn't, consistent with their previous positions or the so-called IRS code. They do as they wish, when they wish. If an RV suddenly creates an estimated 150,000 new millionaires in the USA alone, no written assurances as to the rules to be applied, by anybody, IRS or otherwise, will be worth the paper they're written on.

[Deer Hunter]

Nowhere in the above discussion does it seem to be recognized that the IRS doesn't have to be, and isn't, consistent with their previous positions or the so-called IRS code. They do as they wish, when they wish. If an RV suddenly creates an estimated 150,000 new millionaires in the USA alone, no written assurances as to the rules to be applied, by anybody, IRS or otherwise, will be worth the paper they're written on.
MY way of THINKING also. IRS is as unpredictable as Big Buck. The only thing you can count on is THAT IF THERE IS A HOT DOE IN THE 'RUT SEASON' HE WILL FOLLOW.

When the Dear Dinar is the 'Hot Doe' IRS will follow. They will find it somehow.

[acrtech]

You got that right deer hunter!

[VacationSpot]

I plan to give "Dinars" directly to some charities and let the Tax-Ded Corp.'s cash it out. IF you do that MY UNDERSTANDING is that you can take a tax deduction equal to what 'they get out of it' against that much more that 'you cash in'. 50% was the Federal rule the last I checked. Individual states may vary their amounts and techniques.
This is a very smart idea, by giving a $20,000 dinar note to the charity you can deduct that amount from your taxes and they do not pay taxes as they are a non-profit.

You could greatly reduce your taxable income by donating $100,000 first to your favorite charity thus offsetting the volume you cash in if you cashed in say another $100,000. just repeat that process over and over until you have cashed in what you need too (Then at least a worthwhile cause gets your money instead of taxes).

[wildbill123]

I don't think STUCK ask the right question to the IRS. IF you ask the IRS about foriegn investment in money like the dinar, you will get a total different answer. I beleive some time back the IRS passed new rules on money not being under capital gains taxes. Some one posted a piece that they spoke with the IRS and you would be taxed on interest earned on the money. The piece did include keeping your paper trail of when and where you got your dinars. Some one hit it on the head see an attorney before you do anything and you may save yourself alot of money.

[mailman17]

This is a very smart idea, by giving a $20,000 dinar note to the charity you can deduct that amount from your taxes and they do not pay taxes as they are a non-profit.

You could greatly reduce your taxable income by donating $100,000 first to your favorite charity thus offsetting the volume you cash in if you cashed in say another $100,000. just repeat that process over and over until you have cashed in what you need too (Then at least a worthwhile cause gets your money instead of taxes).
Nice avatar..your missing the lower denoms. By chance, do you know where they are?:giggle: :rofl:

[axvester]

Nice avatar..your missing the lower denoms. By chance, do you know where they are?:giggle: :rofl:What taxes; did somebody say taxes for a currency exchange?:smoke: I gave my daughter $10,000.00 Dinar last night cause I'm the Tooth Fairy. What form should she use on her Taxes?

[shm925]

Personally, I won't mind paying the taxes owed. Even if this revalues at .05, that's $5000 on about a $90 investment for every 100k dinar, maybe less depending on when and where you bought it. You're telling me that you wouldn't be happy with keeping 65% of that tax free. come on guys, stop being so damned greedy. I personally plan on scooping 10% off the top of whatever I get and splitting it between several worthwhile charities and that will reduce my tax liability somewhat. Only plan on selling enough at first to become debt free and holding the rest till I need it. Will only pay taxes as I cash it in. I will be VERY happy paying 35% to Uncle Sam on that kind of return. If you are not happy with that, then you have a problem.

[Chaka]

http://www.offshorepress.com/subscribers/foreign-currency.htm

The Tax Treatment of Foreign Currency Gains or Losses

By Vernon K. Jacobs

A number of my subscribers have presented me with the question of whether certain gains and losses on foreign investments are capital gains and losses and whether any net gains would be eligible for the 15% maximum tax on long term capital gains, if the holding period requirements are satisfied.


To answer this question, it’s necessary to differentiate between different methods of acquiring an investment position in a foreign investment. The following is a non-technical interpretation of the rules in each of these situations. A more detailed analysis of the applicable tax code sections follows this summary.


1. The investor may purchase a foreign currency in exchange for U.S. dollars and hold the foreign currency as a capital asset. Any gain or loss would be a capital gain or loss.


2. The investor may purchase an indirect position in a foreign currency through the purchase of futures contracts, forward contracts, options or similar instruments, but the purchase is denominated in US dollars. Any gain on an unhedged position would be a capital gain or loss. Where the position involves the use of a hedge that meets the definition of a “straddle’ transaction under IRC 1092, the unrealized gain or loss would be recognized as of the end of the tax year.


3. The investor may acquire a debt obligation denominated in a foreign currency. Unless the debt obligation is acquired in connection with a trade or business or an activity constituting the management of investments, any gain or loss will be treated as a capital gain or loss - subject to the provisions of the original issue discount rules. If the debt obligation is acquired in connection with a trade or business or arises from the management of investments (IRC 212) any gain or loss attributable to the conversion of the debt obligation into US dollars would be ordinary income or loss.


4. The investor may acquire an interest in foreign currencies through a trade or business (partnership or proprietorship) conducted in a foreign currency. To the extent that such interests are denominated in a non-functional (foreign) currency, any gain or loss on conversion of the currency to the US dollar would be an ordinary gain or loss.


5. The investor may purchase foreign stocks of publicly held operating corporations with U.S. dollars but the stocks are denominated in a foreign currency. Thus, part of the gain or loss on the foreign stock is derived from the change in currency values while holding the stock and part of the gain or loss is derived from changes in the dollar value of the underlying stock itself. To the extent that the stocks are purchased as investments, the entire gain or loss would be a capital gain or loss - subject to the CFC and PFIC rules.


To the extent that any investments in the form of currencies or debt obligations are acquired in connection with the operation of a trade or business (or in connection with expenses incurred in the management of investments) and are denominated in a foreign currency, any gains or losses arising from conversion of the investments or debt obligations back to the US dollar would be ordinary gains or losses.


6. The investor may purchase the shares of a controlled foreign corporation (CFC) and may be (A) an investor with less than a 10% interest in the corporation or may be (B) an investor with an interest of 10% or more of the controlled foreign corporation’s stock.


Assuming the CFC is not also a PFIC (see below), the investor who owns less than a 10% interest in the CFC would not be subject to tax on the current income of the corporation. Any distributions from the CFC would be taxed as dividends. Any gain or loss on the sale of the stock in the CFC would be a capital gain or loss.


If the shareholder in the CFC owns 10% or more of the stock of the CFC, then that shareholder must report as current income, his or her pro-rata share of the “sub-part F” income of the CFC. Generally, that would include any passive investment income and certain other kinds of income as defined in IRC sections 951 through 954. Generally, “sub-part F income” does not include income from the operation of a business outside the US. If the foreign corporation has any US source income from doing business in the US, it will be required to file a tax return and pay corporate income taxes on that US source income. That income is therefore not treated as “sub-part F income” that is subject to inclusion in the tax returns of the US shareholders of the CFC.


7. The investor may purchase shares of a passive foreign investment company (mutual fund), which may be (A) a “qualified electing fund” or (B) a non-qualified fund.


For a qualified electing fund, the taxpayer will report his or her share of the current income of the PFIC in a manner similar to the shareholders of a US mutual fund.


If the PFIC is not a qualified electing fund, the US shareholder will be taxed on any distributions from the fund when they are received. Distributions of current earnings of the PFIC will be taxed at the shareholder’s regular tax rates. Distributions of accumulated income of the PFIC from previous years will be subject to tax at the highest ordinary income tax rate - which is presently 36%. (It’s not clear whether the 10-% surtax for taxable income in excess of $250,000 is also applicable to such distributions.) In addition, the shareholder will be required to pay interest on the deferred distribution.


The balance of this report provides an analysis of the applicable code sections, including the changes introduced by the Taxpayer’s Relief Act of 1997.


The General Rules With Respect To Foreign Currency Gains or Losses


Prior to the Tax Reform Act of 1986 TRA86), gains or losses on foreign currencies were generally treated as capital gains or losses.


TRA86 introduced a new code section (IRC 988) which essentially changed the tax treatment of gains or losses in foreign currencies into ordinary gains or losses to the extent such gains or losses were denominated in a foreign currency for trade or business transactions or expenses incurred in the production of income. These new rules did not apply where the foreign business kept its books of account in the U.S. dollar. The ordinary income treatment in Section 988 applies to ....


1. The acquisition of a debt instrument or becoming the obligor of a debt,

2. Accruing any item of expense or income, or

3. Entering into or acquiring any forward contact, futures contract, option or similar financial instrument if such instrument is not marked to market at the close of the taxable year (under IRC Section 1256).


The 1986 law defines any transaction arising from a “non-functional” currency as one that is denominated in a currency other than the U.S. dollar. The term non-functional currency includes “coin or currency, and nonfunctional currency demand or time deposits or similar instruments issued by a bank or other financial institution.”


However, IRC 988(e) stated that “This section shall apply to section 988 transactions entered into by an individual only to the extent expenses properly allocable to such transactions meet the requirements of sections 162 or 212 (relating to expenses of a business or certain investment expenses.) This final sub-paragraph appears to exclude the new IRC section 988 code section to anything other than the conduct of a trade or business or the expenses incurred in connection with the production of income, where the related expenses are accounted for in a non-functional (not the U.S. dollar) currency.


As a result of the TRA86 changes, capital gain or loss treatment would still be available for the purchase and sale of most kinds of stock of a foreign entity, and for the direct purchase of foreign coins or currency or foreign time deposits or demand notes by an investor. Currency gains or losses arising from the conduct of a trade or business (including expenses for the production of income under IRC Section 212) are treated as ordinary gain or loss to the extent of the related currency gain or loss.

Changes Enacted With the Taxpayer’s Relief Act of 1997


The Taxpayer’s Relief Act of 1997 (TRA97) provided some simplification and relief with respect to currency gains arising from personal travel for business or investment purposes. For tax years beginning after 1997, the taxpayer is not required to recognize any gain of $200 or less - per transaction. Capital losses arising from these business transactions are not deductible.


When Foreign Currency Gains or Losses Are Capital Gains or Losses

According to IRC Section 1221, every asset is a capital asset unless it is one of a set of stipulated exceptions. Foreign currency gains or losses are not among the stipulated exceptions. The implication is that gains or losses on foreign currencies are therefore capital gains or losses. This was the holding in a 1974 Revenue Ruling. The summary to that ruling states that "The foreign currency is a capital asset and any gain or loss realized on the re-conversion is a capital gain or loss." However, that ruling applied to a taxpayer who incurred a gain or loss as a result of personal (non business) travel to a foreign country and not as an investment. (Rev. Rul. 74-7; 1974 CB 198)


The 1986 tax law essentially changed the rules so that gains or losses arising from the conduct of a trade or business (or similar investment expenses) would be treated as ordinary gains or losses where such gains or losses arose from the conversion of a non-functional currency into U.S. dollars. That law also stipulated that


“ ...any transaction arising from a “non-functional” (foreign) currency as one that is denominated in a currency other than the U.S. dollar. The term non-functional currency includes “coin or currency, and nonfunctional currency demand or time deposits or similar instruments issued by a bank or other financial institution.”

This comment could be construed to mean that any gain or loss on the direct purchase of a foreign currency or coin or debt obligation would be treated as an ordinary gain or loss. However, it can also be construed that gains or losses arising from the purchase of a foreign (non-functional) currency or coins or demand or time deposits would be treated as ordinary gains or losses to the extent the purchases of the currencies were related to the conduct of a trade or business (or investment activity) in a foreign currency. This appears to be the intended construction.


Thus, the direct purchase of foreign currencies to be held for investment purposes - where the investor is keeping his or her accounts in a functional currency (the U.S. dollar) should be treated as a capital gain or loss upon disposition of the foreign currencies or coins. The same principle should apply with respect to the purchase of any foreign debt instruments, demand deposits or time deposits for investment purposes.


Treatment of Certain Foreign Currency Transactions


The primary section of the tax code that deals with foreign currency transactions is section 988. However, this section was intended to require businesses to treat gains or losses in foreign currencies as ordinary gains or losses.


Section 988(a)(1)(A) provides that “… any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary gain or loss.”


A foreign currency gain or loss is defined in section 988(b) as any gain or loss from a “section 988 transaction” as defined below.


A “Section 988 transaction” is defined in section 988(c)(1)(A)(i) as “… any transaction described in subparagraph (B) if the amount … is denominated in a non-functional currency”. Subparagraph B states that section 988 transactions include, (i) the acquisition of a debt instrument, (ii) accruing any item of expense or gross income, and (iii) entering into or acquiring any forward contract, futures contract, option, or similar financial instrument. But section 988(a)(1)(B) provides that a taxpayer may elect to treat such contracts as a capital gain or loss.


Section 988(e)(3) provides an apparent exception from the general section 988 rules for transactions that do not meet the requirements of sections 162 and 212. Section 162 is the section that broadly defines deductible expenses of a trade or business. Section 212 is the section that defines deductible expenses of managing or maintaining investments.


Section 988(e)(1) provides that “ … the preceding provisions of this section shall not apply to any section 988 transaction entered into by an individual which is a personal transaction.” Section 988(e)(3) defines a “personal transaction” as “any transaction entered into by an individual except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet(s) the requirements of “ sections 162 or 212.


The purchase of stock or other investment assets (except certain debt instruments, gains from shares of a CFC or shares of a PFIC) in a foreign currency does not appear to be subject to the IRC 988 rules that treat currency exchange gains or losses as ordinary income or losses.


Thus, the total gain or loss on an investment denominated in a foreign currency should include any currency gain or loss as well as any gain or loss in the value of the underlying investment. The cost basis of the investment is the cost in U.S. $ at the time of purchase (plus any subsequent additions). The proceeds from the investment is the amount realized in US $ at the time of disposition.

[Chaka]

About the Author

Vernon K. Jacobs
Certified Public Accountant



--------------------------------------------------------------------------------

Vernon K. Jacobs is the President of Offshore Press, Inc., Editor and publisher of the online International Wealth Protection Monitor and Research Library , co-author of The Controlled Foreign Corporation Tax Guide and co-author of Risk Management for Amateur Investors. He is a member of the American Institute of CPAs International Tax Technical Resource Panel and Chairman of an AICPA task force on the preparation of the Form 5471 for Controlled Foreign Corporations.
He is an independent tax accountant and consultant who presently focuses on offering tax services for U.S. persons with offshore investments or entities and for non U.S. persons who have tax obligations in the U.S. This includes the preparation of U.S. tax forms and various forms required to be filed by non-resident aliens with investments or assets in the U.S. He prefers to provide assistance to the local tax preparer of taxpayers who have foreign based investments or business interests and no longer provides purely domestic tax services. He also provides consulting and research services involving international tax matters for other CPAs and tax professionals.

The following are some of the international tax forms that he prepares.
3520 and 3520-A For U.S. grantors and beneficiaries of foreign trusts
5471 & 926 For U.S. shareholders in controlled foreign corporations or foreign personal holding companies
8621 For U.S. shareholders in Passive Foreign Investment Companies
8832 & 8858
Entity classification election and annual information return

8865 For U.S. partners in foreign partnerships and other pass through entities
1040-NR Non-resident alien U.S. income tax return
1120F U.S. Income tax return of foreign corporation


Vernon has been an auditor with one of the "big four" international CPA firms, an insurance accountant and executive, a tax newsletter editor, a college instructor, seminar speaker, a tax software developer and self publisher. He is the author or co-author of more than ten books and hundreds of articles about taxes and tax planning. In all of these activities, his primary focus has been related to tax planning and computer technology.


Contact Information
Contact Via Address/Phone/Fax



email Send email to jacobs1 (at) kc.rr.com

Phone (913) 362-9667
Fax (913) 432-7174
U.S. Mail - Company Vernon K. Jacobs, CPA
U.S. Mail - Address POB 8194, Prairie Village, KS 66208



Professional Web site http://www.vernonjacobs.com/

[axvester]

Taxes on Currency exchange is non-sense! I guess we'll just wait and see. :movie: It's not investing, it's currency exchange!:angry: For us it's speculation and hope!:angel: Wishfull thinking...I see the pay off; but not the tax! Sorry:rock:

[Deer Hunter]

I don't think STUCK ask the right question to the IRS. IF you ask the IRS about foriegn investment in money like the dinar, you will get a total different answer. I beleive some time back the IRS passed new rules on money not being under capital gains taxes. Some one posted a piece that they spoke with the IRS and you would be taxed on interest earned on the money. The piece did include keeping your paper trail of when and where you got your dinars. Some one hit it on the head see an attorney before you do anything and you may save yourself alot of money.
I THINK, that also YOU NEED both a CPA and an Attorney. Unless you want to pay an attorney tax prep bill besides his/her advice and privacy protection. Get the two to work together for you and you may get all the 'grunt work' done and signed off by the CPA, under the privacy protection of an Attorney.

Anybody disagree with that? If YOU get any reasonable money to protect out of this it may be a wise choice to get ALL THE HELP YOU CAN. At that point You probably could afford it.

[IraqiFreedom]

Taxes on Currency exchange is non-sense! I guess we'll just wait and see. :movie: It's not investing, it's currency exchange!:angry: For us it's speculation and hope!:angel: Wishfull thinking...I see the pay off; but not the tax! Sorry:rock: Of course it's non sense. Most of the tax code is nonsense, but that doesn't make the tax laws apply any less.

I commend you for taking a principled stand, but good luck in court. Enjoy paying lots of penalties on top of the normal tax.

[axvester]

Round and round:drunk2:
So If I Loose My Arse In This Currency Exchang It's A Capital Loss!

I Will Write Off Any Capital Loss Over $200.00 Because I'm Exchanging Currency!:sleepy:

If We Are Taxed, They Are Stealing Our Money!:punch: Ok, It is non-sense! Does anybody know anybody in History who exchanged currency and paid a Capitol Gains Tax!!!??????????????????????????????

Or better yet, wrote off a loss when exchanged currency???????????

Prove the Axvester wrong, please...Geeeze!

[Oregon49]

Section 988 Pays Full Freight

Section 988 was designed to capture tax payments from companies that earn income from fluctuations in foreign currency exchange rates during the normal course of business, as with the purchase of foreign goods. What this means for currency traders is that all gains and losses are reported and taxed as ordinary income or loss, at the current rate of 35%. (Since futures traders do not trade in actual currencies, they do not fall under the 988 special rules.)

But because currency traders consider these fluctuations part of their capital assets in the normal course of business, the IRS enables them to opt out of Section 988, and thereby take advantage of the more favorable Section 1256 tax rules.

Section 1256: A Better Tax Mix

Why would you want to opt out of Section 988? Lower taxes on gains, of course.

Futures traders are allowed to split their capital gains, with 60% taxed at the lower long-term capital gains rate (currently 15%) and 40% at the ordinary (or short-term capital gains) rate of up to 35%. That combined rate of 23% amounts to a 12% tax advantage over the ordinary (or short-term) rate that currency traders face.

Currency traders with gains tend to opt out of Section 988 in order to take advantage of the 60/40 capital gains split and reduce their tax burden by 12%. But currency traders with losses may prefer to remain under Section 988, where their loss will be treated at the higher ordinary income rate of 35% rather than the lower Section 1256 split.

Of course, there’s a fairly significant catch: in order to opt out of the full-freight 988 rate, you must note your intention to do so before making the trades. The IRS doesn’t require you to notify them; you must only note your intentions “internally” to switch your currency trades to the 60/40 capital gains tax rate.

While the IRS has shown little inclination so far to crack down year to year on traders who may bend the rules and wait until year’s end to make up their minds, they would likely not hesitate to flag a trader whose opting has resulted in years of “cherry-picking” at the tax collector’s expense.

http://www.forexhound.com/article.cfm?articleID=101296

This ruling seems to apply to active currency traders. If you fall into that
catigory with short term holdings, this may be the best way to get around the short term capital gains by choosing the 1256 split for a 21% tax.

Another thought though, if it is taxable when converted back to US$ then why not convert it to something like the pound or euro and only convert the interest to the US$ each month or whatever time table works best for you. Then you are only paying taxes on what you convert for the year. JMO any thought on this.:thinking:


Oregon49

[dagod1]

What if I don't bring the money back to the USA.

Lets say I use 50,000 dinars for a trip to EGYPT for strippers and dinner and a tour. This would be post RV. or post 1 to 1.
So I convert right from dinars to Egypt currency.

Do I still pay tax to the USA?

[IraqiFreedom]

Ok, It is non-sense! Does anybody know anybody in History who exchanged currency and paid a Capitol Gains Tax!!!??????????????????????????????

Or better yet, wrote off a loss when exchanged currency???????????

Prove the Axvester wrong, please...Geeeze!
See the foreign currency transactions on page 30 of this (http://www.irs.gov/pub/irs-pdf/p525.pdf) IRS publication.

Reality is that most people have small gains or losses and don't take the time to calculate this for tax purposes. Let's face it, most probably don't even know that they're supposed to calculate a gain or loss on this issue. If you sold your dinar today and made a bit more than a $200 gain, no one would notice or probably care.

However, in the case of significant dollars, all of the bells and whistles will sound and the IRS will see a big enough tax claim to catch their attention and help meet there quotas.

[IraqiFreedom]

What if I don't bring the money back to the USA.

Lets say I use 50,000 dinars for a trip to EGYPT for strippers and dinner and a tour. This would be post RV. or post 1 to 1.
So I convert right from dinars to Egypt currency.

Do I still pay tax to the USA?Yes, the conversion to another asset creates a taxable event. The IRS does not care that it never became dollars.

I believe that there may be a loophole, if you buy another dinar denominated asset and then sell it, but I'm probably wrong.

[dagod1]

I will just get a good tax attorney that deals with this stuff, pay my tax and maybe get some tax shelters and move on.

I wonder if I can buy gold bars in IRAQ and ship them to the USA. Then cash them in.

No tax on gold!
Dagod1

[Persian_Sailor]

I'm with you Dagod. I need to purchase gold and then sell it back when I get home.

Although, I will have a huge weight issue. Hope they let me claim excess baggage, or arrange my own trip.

[Persian_Sailor]

It would be nice if I could cash out while I was here and then figure out a way to get it deposited into a bank account. I wonder if I would still have to pay taxes on something while in a tax free area?? :wondering: :bandit:

[Deer Hunter]

I THINK, that also YOU NEED both a CPA and an Attorney. Unless you want to pay an attorney tax prep bill besides his/her advice and privacy protection. Get the two to work together for you and you may get all the 'grunt work' done and signed off by the CPA, under the privacy protection of an Attorney.

Anybody disagree with that? If YOU get any reasonable money to protect out of this it may be a wise choice to get ALL THE HELP YOU CAN. At that point You probably could afford it.
Make sure the TWO ARE TOGETHER on the subject.

[IraqiFreedom]

It would be nice if I could cash out while I was here and then figure out a way to get it deposited into a bank account. I wonder if I would still have to pay taxes on something while in a tax free area?? :wondering: :bandit:If you are a US citizen, there is no tax free area! Most countries don't collect tax on the money that their citizens earn abroad, but the US does. In fact the US cries foul when countries help to shelter US citizens from tax, but then does the same thing for the citizens of other countries. What a scam.

[Stuck@Cedar]

If you have dinar in hand... then Quietly take the dinar to a bank in the Cayman Islands and open up a "Dinar" account. This is when YOU actually "redeem" the money. Think about this; when US citizens works OUTSIDE the US, their income is NOT taxable. Most politicians and Gov't leaders in this country have bank accts in the Caribbean... WHY? because they escape taxes (legally). Keep in mind that you WILL have to file the appropriate paperwork showing an offshore acct, but that's only to show our Gov't law enforcement officials that you are not terrorists and that you are not "laundering" money for them. There are several banks in the Caymans to choose from.. Google banks in the Caymans and choose your own. It's also worth making a phone call to them and get the details on how to set up the account. One last recommendation.... when the dinar revalues, "charter" and aircraft... don't go commercially.... You leave the US without the B.S. from customs and the Cayman officials always welcomes your money with open arms!!

Hank, what have you been smoking? Obviously you have either:
A. never worked outside the U.S.
B. Had an accountant that wasn't too good on the IRS rules or
C. You didn't make enough money to significantly exceed the deduction you can qualify for on IRS form 2555.

I work overseas (Iraq), my accountant knows the laws (and I try to keep up on them too) and I significantly exceed the form 2555 deduction. :drunk: The max 2555 deduction for 2007 was $85,700.00 IF you qualified for the entire year. Briefly, you have to have a minimum of 330 qualifying days in a 12 month period (in a country or countries outside the U.S and it's territories) and you can deduct $234.79 for each qualifying day ($85,700.00/365). Anything over that I pay taxes on. Yes, I can still claim deductions, but I still have to pay taxes. (my reference? IRS form 2555 of course!)

If you work overseas for a foreign company that has no dealings with the US government and they don't report what you make to the government, then you might be able to get away with paying no taxes. Could you get away with not paying any taxes on your gains? Maybe, but I didn't start this thread to discuss what you can or can't get away with. I started this thread to discuss what the IRS code indicates.


I don't think STUCK ask the right question to the IRS. IF you ask the IRS about foriegn investment in money like the dinar, you will get a total different answer. I beleive some time back the IRS passed new rules on money not being under capital gains taxes. Some one posted a piece that they spoke with the IRS and you would be taxed on interest earned on the money. The piece did include keeping your paper trail of when and where you got your dinars. Some one hit it on the head see an attorney before you do anything and you may save yourself alot of money.

Do you have an IRS form, publication, instruction or whatever as a reference? If you re-read my original post, you will find that I covered the fact that you can "get a totally different answer" from the IRS even if you ask the SAME question.:headbang: (If you listen to an incorrect answer and file your taxes incorrectly because of that answer... it's still your fault and you'll have to pay back taxes, penalties and interest if the IRS realizes you filed an incorrect return.) I also covered the "I heard...", "someone posted an article..." yada yada yada. I seem to remember someone posting that foreign currency doesn't qualify as an investment unless it is through the FOREX:eek: ... see, just more confusion!:giggle: My original intent of this thread was factual information WITH IRS REFERENCES to try to eliminate at least some of the confusion and questions that are out there concerning the tax ramifications of an RV. That is why I ended the original post with "If anyone finds anything else - with reference - please let me know." You gave very good advice at the end of your post, see an attorney. If the Dinar revals the way most people are hoping, attorney's fees will be a minor inconvenience.

[mark hofstra]

So ...... the best thing to hope for is an r/v before the elections. Find the best tax attorney and CPA you can find and get them in the same room together. Contribute to charities in dinar. Is that about it? Is there any more discussion on off-shore accounts? From other threads I thought that there were reasons why off-shore accounts were not the way to go ..... like too many hoops to jump through.

[markmc]

I've been thinking of this and maybe we should consider the following:

I'm sure there will be plenty on banks who have branches in other countries where you can keep money in their currency or another countries currency on account. Maybe even a Swiss bank. Seems to me that I had X number of Dinars before RV, I still have the same number of Dinars after RV, I deposit Dinars in bank, no change, no taxes except on interest from said bank.

If I do want to withdraw money US I will then pay taxes on the exchange.
Seems most of us plan on keeping as much after the RV anyway. You can
maybe even invest your Iraqi Dinars in an investment and take the proceeds back in Iraqi Dinars.

Don't know but just thinking..........

[War Eagle]

Before you "blast" somebody------READ THE IRS CODE------PUBLICATION 525,PAGE 30------------------IT SPELLS IT OUT IN SIMPLE TERMS-----------------------------AND.YES,THIS PERSON IS CORRECT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!

[fatmaninthebathtub]

Before you "blast" somebody------READ THE IRS CODE------PUBLICATION 525,PAGE 30------------------IT SPELLS IT OUT IN SIMPLE TERMS-----------------------------AND.YES,THIS PERSON IS CORRECT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!

Check the date of this thread.

[Geoidinar]

For tax year 2011, Publication 525 - page 33 - middle column - under Foreign currency transactions it reads "If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200, report it as a capital gain."

http://www.irs.gov/pub/irs-prior/p525--2011.pdf

[ExecConsult]

Dinar Income Tax Analysis

Hi, My name is Mark. I’m an estate planning attorney. I’ve been reading lots of topics and posts on taxes going back and forth. Most indicate that people believe that income from exchanging Dinar for US $ will be treated as capital gains. This is what I used to believe too.

You’ll find that I have put the same information into other posts, but I’ve never quite put it together this comprehensively before. The following also has corroboration from an “International Examiner” at the IRS. It is long, but I urge you to take the time to read and understand it.
__________________________________________________ __________________________________________________ ______________________________________________

I have read, “I talked to my CPA/attorney about this and they said it would definitely be ___________.” (Fill in the blank with whatever you want it to be – I’ve seen it I think.) Since all professionals know the same stuff, why don’t we all see the same answer. I think there are two reasons. 1) We all know pretty much the same “basics” but not all the same specialized information. Those who think of currency exchange in relation to the basics immediately think, “appreciated asset = capital gains.” However, if you want to know more than the basics . . . (read what follows).


MY ANALYSIS OF THE TAXATION ON A DINAR INVESTMENT

Section 988 OR Section 1256?

The Internal Revenue Code (IRC) deals with foreign currency exchange profits and losses under two different Sections; 988 and 1256. The primary section, 988, deals with gains and losses as ordinary income (with one small exception). However, foreign currency investors are often able to opt out of Section 988 and have their investments treated as Capital Gains under Section 1256. Unfortunately, Section 1256 only applies to contracts (i.e. futures contracts and forward contracts) for regularly traded foreign currency. Even if Dinar were a regularly traded currency, I have not seen anyone saying, “I just purchased a spot contract on Dinar this morning. Go RV!!” What I see instead is that people have purchased Dinar either in an account or the physical currency and will hold that currency as long as they want to hold it. Therefore, even if Dinar were a regularly traded currency (which it is not), Section 1256 still does not apply. Therefore you are stuck under Section 988.

The Confusion of Section 988

Many people have looked at IRS Publication 525, Pg. 33 to justify their assertions that your Dinar revaluation (RV) income should be treated as Capital Gains. It states:

Foreign currency transactions. If you have
a gain on a personal foreign currency transac-
tion because of changes in exchange rates,
you do not have to include that gain in your
income unless it is more than $200. If the gain
is more than $200, report it as capital gain.

This sounds pretty cut and dried. However, you should never underestimate the confusion of the IRS or its code, the IRC. The above quote refers to a “personal . . . transaction.” You might be surprised to know that what you have done is not a “personal transaction” under the language of Section 988. IRS Pub. 525 did not anticipated a situation where masses of individuals would be investing in foreign currency with hopes of obscene profits. This language is intended for the traveler who went to New Zealand on “holiday” and when they returned and exchanged back to dollars, they had a little bit of gain or loss. That is not your situation.

Breaking it Down

I figure the best way to make everything clear is to show you the part of Section 988 dealing with “Personal Transactions.” and then explain it.

Section 988 (e)
Application to individuals
(1) In general
The preceding provisions of this section shall not apply to any section
988 transaction entered into by an individual which is a personal
transaction. [So far it looks pretty good. This means
it will not be ordinary income. It will be treated like any
other asset and be Capital Gains.]

(2) Exclusion for certain personal transactions
If–

(A ) The preceding provisions of this section shall not apply to any
transaction, and

(B ) such transaction is a personal transaction,

no gain shall be recognized for purposes of this subtitle by reason of
changes in exchange rates after such currency was acquired by such
individual and before such disposition. The preceding sentence shall not
apply if the gain which would otherwise be recognized on the transaction
exceeds $200. [This means that if the gain is lower than $200 you don't even claim it.
However, if you exceed $200 then you are back to my previous statement.
Still looks pretty good. This is where the information for IRS Pub 525 comes from.
Unfortunately this is where most people stop.]

(3) Personal transactions
For purposes of this subsection, the term “personal transaction” means [finally a definition]
any transaction entered into by an individual, except that such term shall
not include any transaction to the extent that expenses properly
allocable to such transaction meet the requirements of–

(A ) section 162 (other than traveling expenses described in
subsection (a)(2) thereof), or

(B ) section 212 (other than that part of section 212 dealing with
expenses incurred in connection with taxes). [and we still don't know what it "shall not include"]

You can see how this can get confusing. To really look at it, we should probably go to Section 162 and Section 212, but I’m going to skip 162 and tell you what 212 says:

Section 212. Expenses for production of income
In the case of an individual, there shall be allowed as a deduction all the ordinary
and necessary expenses paid or incurred during the taxable year–

(1) for the production of income
(2) for the management, conservation, or maintenance or property held for
the production of income; or
(3) in connection with the determination, collection, or refund of any tax.

This is the point where there has been some argument:

Some people will claim that they have no expenses that they could deduct under suction 212 or section 162 so the exception should still apply. However, the world of the IRS is not that cut and dried. To discuss this point I’ll borrow from Mark Feldman’s post on a recent Forbes blog. The quote follows:

I am the tax attorney at Green & Company, Bob Green’s CPA firm. We have blogged about Section 988 and forex in general. See our forex discussions at http://www.greencompany.com/EducationCenter/GTTRecCurrency.shtml

…

Tax attorneys look not only to the language of the Internal Revenue Code but also to the theory behind the Code. It is clear from the Congressional Reports issued at the time that this rule was adopted that option #2 is correct.

The legislative history (Committee Reports to ’86 TRA, , PL 99-514) states:
“Section 988 applies to transactions entered into by an individual only to the extent that expenses attributable to such transactions would be deductible under section 162 (as a trade or business expense) or section 212 (as an expense of producing income, other than expenses incurred in connection with the determination, collection or refund of taxes). Thus, for example, section 988 is inapplicable to exchange gain or loss recognized by a U.S. individual resident abroad upon repayment of a foreign currency denominated mortgage on the individual’s principal residence. The principles of current law would continue to apply to such transaction.”

“Would be deductible”—-not “are deductible”. It is enough that theoretically, if such expenses were incurred, they would be deductible.

This also makes sense from the point of view of tax theory. The point of this rule is not to create an arbitrary link to deductions, but to say that if the taxpayer is involved in Section 162 or 212 types of activities, this is not a personal transaction but a business transaction.

The CPA Robert Green, with whom Mr. Feldman works, frequently blogs on Forbes’ web site. Soon after the above comment was posted Mr. Green made the following blog post:

My recent blog, “Is The Iraqi Dinar Worthless Paper Or Maker Of Millionaires?” generated a firestorm of comments and opposing views. Here are some additional tax answers to questions and comments made.

Various IRS publications discuss tax rules for physically-held currency held for personal-use, mentioning capital gains treatment on gains, and no tax-deductible loss (capital or otherwise) on personal-use losses. These are standard tax rules for personal-use property. Taxpayers may only deduct capital losses on investment (Section 212) or trade or business (section 162) property.

Taxpayers who purchase Iraqi dinars generally are buying dinars for investment purposes, not personal-use. An example of personal use would be buying euros to use while traveling in Europe for personal reasons.

When it comes to physically-held currency and forex transactions (spot and forward) held for investment or business use, Section 988 (foreign currency transaction) tax rules apply. Section 988 is ordinary gain or loss tax treatment. Good news, the capital loss limitation of $3,000 per year does not apply to Section 988 ordinary losses.

An investor holding forex as a capital asset may file a contemporaneous election to opt-out of Section 988 into capital gains and loss rules, otherwise known as the capital gains election. But if you invest in physically-held currency, Section 988 does not permit you to opt-out of Section 988.

In summary, if you heard from an accountant, the IRS or a friend that capital gains apply by default to physically-held currency, that answer is only correct for personal-use sales of physically-held currency. It’s incorrect for the sale of physically-held currency or forex held for investment or business purposes. And don’t forget, you can’t take a tax loss of any kind (capital or ordinary) on the sale of personal-use physically-held currency either.

CONCLUSION

If you purchased dinar and then held it because you hope to make money it is an investment activity. Under Section 988 exchange gains (or losses) are taxed as ordinary income (not capital gains). The only exception to that is if you have a “Personal Transaction” that is not a business or investment activity. However, if you are a dinar investor you can NOT CLAIM the “Personal Transaction” exception because you are participating in an investment type activity.

A WAY OUT
Being excluded from being able to use the “Personal Transaction” exception in section 988 (e ) hinges on whether or not you are participating in an investment or business type activity. That means you got the dinar so you could make money. There are two potential ways out of ordinary income and back into the “Personal Transaction” exception.

Way 1
The exception to this is if you absolutely had NO investment or business purpose in obtaining your dinar. Since none of us got our Dinar in contemplation of an exotic vacation to the Iraqi deserts, the only way that happens is if you got it as a gift (not as an investment). Then you may be able to claim capital gains treatment. (Be ready to prove it was a gift if you get audited.)

Way 2
So far I have told you what the current IRS’ position is on any income derived from a revaluation of the Iraqi dinar. One other possibility is to disagree with the IRS’ position and ask them to agree with you. If they don’t you can even fight them in Court. I only bring this up to point out options. The likelihood of success in my opinion is very slim.

WHAT THE IRS THINKS OF MY ANALYSIS
To further corroborate my analysis of how the IRS would determine the tax on these transactions (not what we would like to believe), I sent my analysis to a friend who is a criminal investigator for the IRS. She forwarded it to an “International Examiner” who agreed with my analysis. (Ordinary Income unless you received it as a gift.)

FINAL COMMENTS
As I said before, I am an “Estate Planning” attorney. I am not a tax attorney. I am tax trained with my undergrad being in accounting, receiving a certificate in tax from my law school, and working in a field where I am constantly looking at ways to help people save taxes. However, I am not above understanding that I can be wrong sometimes. However, until someone can show me where, under the law, Mr. Green, Mr. Feldman, and myself are wrong, I am very confident in this position. Be safe with the IRS – it is ordinary income under Section 988. Dinar investors should expect to pay 35% maximum federal tax rate as ordinary income following any income event with their dinar.

Best of Blessings,

Mark

SHORTENED DISCLAIMER
Should put a disclaimer here – I am an attorney – you can’t use this as legal advice and we do not have an attorney client relationship (Assume this goes for anything I ever write unless I am writing it just for you as my client.)

[shinerguy]

Thanks for providing some clarity to the IRS "blackhole". I've been thinking of the gift aspects but can't find the information on capital gains from a gift. In short when I gift it does the clock start when I purchased them or when the recipient received them. Will their basis be what I paid or what it is worth when I gift it?