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Unitedrich

Default IRS Rules on Currency Exchange

71 posts in this topic

[b]Default IRS Rules on Currency Exchange[/b]
August 27, 2010 ·

[i][b]TIDBIT: Sent to me by one of you. Thank you Ed! I’d suggest each of you PRINT THIS OUT and bring it with you to discuss with your CPA/Tax Attorney- DD[/b][/i]

[b] IRS rules on currency exchange[/b]
[indent]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 [url="http://www.irs.gov/pub/irs-pdf/p525.pdf"]http://www.irs.gov/p...rs-pdf/p525.pdf[/url], the 2007 issue of [b]Taxable and Nontaxable Income[/b], on page 30:

[b]Foreign currency transactions. [/b]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.

[/indent]
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I'm just a little curious about the date.
2007?
Doesn't the IRS have a tendency to change things every year...? Edited by mrparrot
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[quote name='mrparrot' date='27 August 2010 - 08:26 PM' timestamp='1282966000' post='178304']
I'm just a little curious about the date.
2007?
Doesn't the IRS have a tendency to change things every year...?
[/quote]
you would actually be surprised. they do but I dont think they make handbooks every year. right now my sister is still trying to clear up her taxes from 2009. they keep mailing her some piece of garbage asking her to fill something else out - that doesnt even apply to her at all. they sent a 2007 manual and told her to fill out schedule m. I found the 2009 sched m online and it was nothing like the 2007 version they sent her!!!
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I found this on the IRS site. It might give some help to some of our questions.

http://www.irs.gov/newsroom/article/0,,id=106799,00.html
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[quote name='Unitedrich' date='27 August 2010 - 03:19 PM' timestamp='1282940369' post='177997']
I obtained this from another site. UR

IRS rules on currency exchange

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:
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, the 2007 issue of Taxable and Nontaxable Income, on page 30:

[/quote]
That rule does not apply to you. The IRS employee you who gave you the answer did not understand the situation. The fact that you sought and obtained an answer will probably keep the IRS from charging you with fraud, but it won't stop them from charging additional tax and penalties if they audit you.

HERE IS YOUR ANSWER
Foreign currency exchanges are either dealt with under Section 1256 or under Section 988 of the Internal Revenue Code. Section 1256 is set up for gains on contracts (futures & forward contracts) made by investors in widely traded currency. Since this is not a widely traded currency and since it is not under contract, Section 1256 does not apply.

The IRS Publication 525 that you referenced mentions a "Personal Transaction" above $200. (By the way it is on page 33, not page 30) This language comes directly out of Section 988. However, what you are doing is not a personal transaction. Personal transaction as contemplated in Section 988 specifically excludes anything done for the purpose of producing income (referenced under section 212). A "Personal Transaction" is one where you exchange money for your trip to Belgium and when you get back you exchange it back. Everyone on this board is holding currency for the purpose of producing income. That is not a "Personal Transaction" but is an income producing investment transaction. Therefore, it falls under the rules of Section 988 and is Ordinary Income.

However, don't despair too much. There are things to be done to minimize the impact of the higher taxes.

by the way - this is not a "Some attorney said so." I am the attorney saying so. (Note: You still don't get to claim that I have given you legal advice or created an attorney client relationship. Also, pursuant to circular 230, none of the information can be used to avoid tax penalties.)
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[quote name='ExecConsult' date='20 October 2010 - 07:35 AM' timestamp='1287574514' post='231150']
[B]y the way - this is not a "Some attorney said so." I am the attorney saying so. (Note: You still don't get to claim that I have given you legal advice or created an attorney client relationship. Also, pursuant to circular 230, none of the information can be used to avoid tax penalties.)
[/quote]
Thank you Execconsult, for bringing some clarity to this situation, and to you, UR for opening this timely discussion. And of course, to all who are weighing in on this topic for the benefit of all.
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This is straight from the IRS site, maybe this will answer the question "how much tax"

10 Facts About Capital Gains and Losses


IRS Tax Tip 2010-35


Have you heard of capital gains and losses? If not, you may want to read up on them because they might have an impact on your tax return. The IRS wants you to know these ten facts about gains and losses and how they could affect your tax situation.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

You must report all capital gains.

You may deduct capital losses only on investment property, not on property held for personal use.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.

The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2009, the maximum capital gains rate for most people is15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13of Form 1040.
For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).


http://www.irs.gov/newsroom/article/0,,id=106799,00.html
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[quote name='livingproof' date='20 October 2010 - 07:00 AM' timestamp='1287576053' post='231162']
This is straight from the IRS site, maybe this will answer the question "how much tax"

10 Facts About Capital Gains and Losses


IRS Tax Tip 2010-35

http://www.irs.gov/newsroom/article/0,,id=106799,00.html
[/quote]
This is not capital gains.

While the site you mention has good information for Capital Gains, the income from Dinar investments will be Ordinary Income (NOT capital gains) under Section 988. Please see my post above for more information.

Best of Blessings,
Mark
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[quote name='ExecConsult' date='21 October 2010 - 06:36 AM' timestamp='1287657404' post='232384']
This is not capital gains.

While the site you mention has good information for Capital Gains, the income from Dinar investments will be Ordinary Income (NOT capital gains) under Section 988. Please see my post above for more information.

Best of Blessings,
Mark
[/quote]


Thanks Mark,
I appreciate your information from someone "in the know". If you obtain any more data that may pertain to us, please let us know.
UR
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[quote name='ExecConsult' date='21 October 2010 - 06:36 AM' timestamp='1287657404' post='232384']
This is not capital gains.

While the site you mention has good information for Capital Gains, the income from Dinar investments will be Ordinary Income (NOT capital gains) under Section 988. Please see my post above for more information.

Best of Blessings,
Mark
[/quote]
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[quote name='ExecConsult' date='21 October 2010 - 05:36 AM' timestamp='1287657404' post='232384']
This is not capital gains.

While the site you mention has good information for Capital Gains, the income from Dinar investments will be Ordinary Income (NOT capital gains) under Section 988. Please see my post above for more information.

Best of Blessings,
Mark
[/quote]


the link didin't work. it says the page does not exist....can you check that?
thanks.
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Just finished printing and reading Title 26 Section 988 of the US Code of Regulations. The web site www.law.cornell.edu/uscode has a very readable form.

Section 988 (e) Application to individuals (1) The preceding provisions of this section shall not apply to any section 988 transaction entered into by an individual which is a personal transaction.

The "preceding provisions" would be all of the rest of section 988.
We are individuals.
Therefore it appears that this Section would not apply to our dinar exchange
Capital gains and losses seems to be a better fit for us.
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Baymd, you missed ExecConsult's point. It is true that section 988 excludes personal transactions. The point is, this is not a personal transaction. It is an investment that we made to produce income. I had this same discussion with a tax attorney a couple of months ago, and he researched it and printed out section 988 of the IRS tax code and gave it to me and explained exactly what ExecConsult just tried to explain to us. I believe that it will, unfortunately, be taxed as regular income. Though I'm hoping for many that they won't actually get in trouble for reporting it as capital gains. Oh, and ggggggggooooooooRRRRRRRRVVVVVVVVVV!!!!!!!!!!!!!!!!!! :lol:
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[quote name='rjboots1' date='21 October 2010 - 09:22 AM' timestamp='1287670976' post='232634']
Baymd, you missed ExecConsult's point. It is true that section 988 excludes personal transactions. The point is, this is not a personal transaction. It is an investment that we made to produce income. I had this same discussion with a tax attorney a couple of months ago, and he researched it and printed out section 988 of the IRS tax code and gave it to me and explained exactly what ExecConsult just tried to explain to us. I believe that it will, unfortunately, be taxed as regular income. Though I'm hoping for many that they won't actually get in trouble for reporting it as capital gains. Oh, and ggggggggooooooooRRRRRRRRVVVVVVVVVV!!!!!!!!!!!!!!!!!! :lol:
[/quote]
well as far as I could see....capital gains, after a certain amount, that a great majority of us will sass for sure, is the same rate as normal income. is that wrong?
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[quote name='PAPATOM' date='21 October 2010 - 10:41 AM' timestamp='1287672091' post='232667']
well as far as I could see....capital gains, after a certain amount, that a great majority of us will sass for sure, is the same rate as normal income. is that wrong?
[/quote]
Capital gains is either short term-held for less than 1 year taxed as ordinary income or
long term-held for over 1 year taxed at maximum of 15% unless tax is allowed to expire and the rate will then be a max of 20% as I understand it
If capital gains turns out to be the tax treatment for this investment having proof of purchase would help determine your holding term
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[quote name='rjboots1' date='21 October 2010 - 10:22 AM' timestamp='1287670976' post='232634']
Baymd, you missed ExecConsult's point. It is true that section 988 excludes personal transactions. The point is, this is not a personal transaction. It is an investment that we made to produce income. I had this same discussion with a tax attorney a couple of months ago, and he researched it and printed out section 988 of the IRS tax code and gave it to me and explained exactly what ExecConsult just tried to explain to us. I believe that it will, unfortunately, be taxed as regular income. Though I'm hoping for many that they won't actually get in trouble for reporting it as capital gains. Oh, and ggggggggooooooooRRRRRRRRVVVVVVVVVV!!!!!!!!!!!!!!!!!! :lol:
[/quote]
Should have referenced additional info on section 988
Section 988 9(e)(3) Personal Transactions
"For purposes of this subsection, the term "personal transaction" means any transaction entered into by an individual"

Hopefully all investments produce income. When it does it is classified as capital gain income according to IRS
See IRS 10 Facts About Capital Gains and Losses FACT 1 Almost everything you own and use for personal purposes, pleasure or INVESTMENT is a capital asset.
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how will they know if you are short term or long term if you bring in physical dinar out your hand..so my question is ,is if i just bought some this year and go cash in soon after rv and i tell them i been holding it since 09 then will they have any proof to tell me im lieing? just a question..
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Ain't it a GOOD situation to be in???????????paying taxes on our PROFITS from the revaluation of the Iraqi DINAR!!!!!!!!!!!!!!!!!!!!!!!!!!!WONDERFUL,FANTASTIC,STUPENDOUS,----------------------------------------------now,all we have to do is sit back,relax,take a deep breath,and---------------------------------------------------------------------------------WAIT for it to happen!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!and it WILL happen----just don't know exactly when,or how much!!!!!!!

I have ONLY been in this for five (5) LONG years!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!maybe,just maybe this roller-coaster is finally coming to a halt!!!!!!
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[quote name='PAPATOM' date='21 October 2010 - 08:42 AM' timestamp='1287668557' post='232552']
the link didin't work. it says the page does not exist....can you check that?
thanks.
[/quote]
Papatom - I finally understand what you were talking about saying my link didn't work. However, the link wasn't mine. It was in the quote I was answering. The problem with the link is that it does not include the entire URL. You can not just click on it. You have to copy the whole thing (both the blue part and the black part) and paste it in your browser. The point I was making is that the link is superfluous because it deals with capital gains and these investments will not be getting capital gains treatment.
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[quote name='baymd' date='21 October 2010 - 12:14 PM' timestamp='1287681260' post='232790']
Should have referenced additional info on section 988
Section 988 9(e)(3) Personal Transactions
"For purposes of this subsection, the term "personal transaction" means any transaction entered into by an individual"

Hopefully all investments produce income. When it does it is classified as capital gain income according to IRS
See IRS 10 Facts About Capital Gains and Losses FACT 1 Almost everything you own and use for personal purposes, pleasure or INVESTMENT is a capital asset.
[/quote]
Ooooooo! The IRS is tricky isn't it. Yes Baymd, that is exactly what it says. However, it goes on to say, "except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirement of --

(A) section 162 ...
(B) section 212 ....

Here it the problem -- any expenses involved with this transaction would meet the requirements of 212 which 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 or collection of income
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.

Therefore, these transactions that have bank fees, transportation fees, etc... that would qualify under section 212 are SPECIFICALLY EXEMPTED from treatment as "Personal Transactions" under 988.

Further, even if you could get around the section 212 issue because you received it as a gift, you are still out of luck because section 988 (9)(e)(2) which first gives the personal transaction states, "The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200. I am sure everyone here is expecting more than $200 in profits.

No one should feel bad if it is hard to follow this stuff. I have a certificate in tax from my law school and it still took me a little bit to dig through it all.

Best of Blessings,
Mark
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[quote name='ExecConsult' date='20 October 2010 - 05:35 AM' timestamp='1287574514' post='231150']
That rule does not apply to you. The IRS employee you who gave you the answer did not understand the situation. The fact that you sought and obtained an answer will probably keep the IRS from charging you with fraud, but it won't stop them from charging additional tax and penalties if they audit you.

HERE IS YOUR ANSWER
Foreign currency exchanges are either dealt with under Section 1256 or under Section 988 of the Internal Revenue Code. Section 1256 is set up for gains on contracts (futures & forward contracts) made by investors in widely traded currency. Since this is not a widely traded currency and since it is not under contract, Section 1256 does not apply.

The IRS Publication 525 that you referenced mentions a "Personal Transaction" above $200. (By the way it is on page 33, not page 30) This language comes directly out of Section 988. However, what you are doing is not a personal transaction. Personal transaction as contemplated in Section 988 specifically excludes anything done for the purpose of producing income (referenced under section 212). A "Personal Transaction" is one where you exchange money for your trip to Belgium and when you get back you exchange it back. Everyone on this board is holding currency for the purpose of producing income. That is not a "Personal Transaction" but is an income producing investment transaction. Therefore, it falls under the rules of Section 988 and is Ordinary Income.
[b][font="Times New Roman"]But only if you are a corporation as defined by the 14[sup]th[/sup] amendment right ExecConsult? Is it true that the 14[sup]th[/sup] amendment created a de facto government and explains how a de facto corporate US government created corporation out of human beings to strip them of the constitutional rights? Is Bruce Riggs correct? How else would they take away guns, free speech and impose illegal search and seizure and a direct income tax among other things that are unconstitutional? [/font][/b]

[b][font="Times New Roman"]If Bruce Ray Riggs is wrong you can take the $136,800 reward and I, for one would like to see you do it. Are you up for the challenge? Here’s the website and all the legal documentation.[/font][/b]

[b][font="Times New Roman"] [/font][url="http://www.dirtyunclesam.com/"][font="Times New Roman"]http://www.dirtyunclesam.com/[/font][/url] [/b]


However, don't despair too much. There are things to be done to minimize the impact of the higher taxes.

by the way - this is not a "Some attorney said so." I am the attorney saying so. (Note: You still don't get to claim that I have given you legal advice or created an attorney client relationship. Also, pursuant to circular 230, none of the information can be used to avoid tax penalties.)
[/quote]
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