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  1. #1
    Join Date
    Dec 2011
    Posts
    15

    Default How is Money Taxed when Cashing in Foreign Currency

    My question involves estate planning in the state of: WA

    Unable to locate a more appropriate topic, I post here.

    Ultimately, this is a question for a tax attorney. Still, I bet someone understands some general principles asked about here.

    Example: A person spends $5,000 purchasing a foreign currency which he takes delivery of and holds. Two months later, it is valued at $25,000. They cash it in realizing a $20,000 profit.

    How is this looked at and taxed by the IRS? Short term capital gain? Ordinary income?

    Is it, like the hard assets gold and silver, considered a 'collectible' and taxed at a 28% rate? If so, is that tax in addition to (or in lieu of) income tax on the remaining amount?

    I'd love to see some informed reflections on this.

    TIA

    drcarl

  2. #2
    Join Date
    Feb 2010
    Location
    CT & IL
    Posts
    5,273

    Default Re: How is Money Taxed when Cashing in Foreign Currency

    I think that this is an investment (currency) -- capitol gains. Not an "other income" item.

    Its not a game for the faint hearted .. there a ETFs out there that do the same thing ... 1x, 2x, 3x the change.

    As all ETFs are ...

    So there is no need to buy currency (and lose 5% on ea transaction) ...

    You can call the IRS 1-800-829-1040 (think thats their #) .. if wishing to chk with the authority

  3. #3
    Join Date
    Dec 2011
    Posts
    15

    Default Re: How is Money Taxed when Cashing in Foreign Currency

    David, thank you for your reply...and for the IRS number....why didn't I think of that? lol

    Still looking for a very firm (not I think, though that's a little helpful) answer to these:

    1) How is this looked at and taxed by the IRS? 1a) Short term capital gain? 1b) Ordinary income?

    2) Is it, like the hard assets gold and silver, 2a) considered a 'collectible' and 2b) taxed at a 28% rate?

    3) If #2 is so, is that tax in addition to (or in lieu of) income tax on the remaining amount?

    TIA

  4. #4
    Join Date
    Jul 2007
    Location
    Florida
    Posts
    2,344

    Default Re: How is Money Taxed when Cashing in Foreign Currency

    Just as an FYI, an IRS telephone staffer is the last place I'd send someone for accurate tax information.

    This is a much more complicated area of tax law than you might imagine. Some foreign exchange transactions are categorized under Section 1256 contracts while others are treated under the Section 988 of the IRC. Section 1256 provides a 60/40 tax treatment which is lower compared to its counterpart. Those typically involve futures contracts.

    By default, all forex contracts are subject to the ordinary income or loss treatment. Gains and losses from currency trades are taxed as ordinary income and losses under Section 988.

  5. #5
    Join Date
    Dec 2011
    Posts
    15

    Default Re: How is Money Taxed when Cashing in Foreign Currency

    Bubba, thanks. I bet you're right about the phone staffers. Silly me to think they'd actually know their stuff. I've heard stories of three calls yielding three completely different pieces of advice. I'd hope they know more than me, though, with the internet I can learn an awful lot! (or is it a goodly lot?)

    I understand that one needs to make a note somewhere (one's books?) to 'opt out' of S. 988 before some trade in order to legitimately use the 1256, though some wait until the end of the year to see which is better. I will get good advice later if needed. Also, this is not a contract for currency that I refer to. It's actually taking delivery of the notes. So, looks like 'ordinary income' to me.

    Sure seems like the 988 and 1256 refer to contracts, which are absent from this example.

    Thanks for your reflection

    drcarl

  6. #6
    Join Date
    Jul 2007
    Location
    Florida
    Posts
    2,344

    Default Re: How is Money Taxed when Cashing in Foreign Currency

    Without digging too much further, I'm fairly confident that it's not capital gain income in any case.

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