You got that right deer hunter!
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).
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.
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.
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.
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 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/
Taxes on Currency exchange is non-sense! I guess we'll just wait and see. It's not investing, it's currency exchange! For us it's speculation and hope! Wishfull thinking...I see the pay off; but not the tax! Sorry
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.
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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.
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.
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?
this 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.
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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!
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.
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??