Guest views are now limited to 12 pages. If you get an "Error" message, just sign in! If you need to create an account, click here.

Jump to content
  • CRYPTO REWARDS!

    Full endorsement on this opportunity - but it's limited, so get in while you can!

Default IRS Rules on Currency Exchange


Unitedrich
 Share

Recommended Posts

When I was going through my undergraduate degree, I wrote a paper for my tax law class about how the US Income Tax is unconstitutional. I still believe it may be, but that really doesn't matter because the Courts don't think so. I am not willing to place my own peace and freedom or the peace and security on the line to fight a battle with the Courts over taxes. Following is a website that tracks cases of high profile tax protesters through their eventual incarceration. Enjoy:

http://www.quatloos.com/Q-Forum/viewforum.php?f=30&sid=14d42191ad0f087964a016e8b3d721ab

Best of Blessings,

Mark

  • Upvote 1
Link to comment
Share on other sites

When I was going through my undergraduate degree, I wrote a paper for my tax law class about how the US Income Tax is unconstitutional. I still believe it may be, but that really doesn't matter because the Courts don't think so. I am not willing to place my own peace and freedom or the peace and security on the line to fight a battle with the Courts over taxes. Following is a website that tracks cases of high profile tax protesters through their eventual incarceration. Enjoy:

http://www.quatloos....4a016e8b3d721ab

Best of Blessings,

Mark

How about freedom?

Edited by Chaser51
Link to comment
Share on other sites

Chaser51 - I do share your concerns.

I am cognizant of our freedoms being stripped away systematically over time.

I am aware that the Government is consistently convincing people to give up freedoms for supposed security.

I hate it and do my part to work against it. However, I am attempting to still work through the political process and work within the system instead of working in what I would consider to be open rebellion to the system that is doomed to eventual failure.

If we ever get to that point, it will not be the tax courts I am worried about....

I will continue to try to fight for freedoms through the processes that don't expose my family to the possibility of losing the support, guidance, love, and companionship of their father and husband. If the scales should ever tilt far enough toward the need to fight for freedom, I'm sure the Lord will direct me and prepare my family. That time has not yet arrived.

I am well aware of what is going on. I will not be the frog boiled in the pot of socialism one degree at at time, but I will also not throw myself into a battle with little chance of real success and large amounts of potential stress and peril for my family unless and until God himself directs me through his Holy Spirit to do so.

Best of Blessings,

Mark

  • Upvote 7
Link to comment
Share on other sites

Hi Mark. First, thanks for your research. I have a question for you (please understand that I am not disagreeing with you, just trying to sort out the verbiage). As an attorney you know that every word in the legal world has meaning. My question is, in the sentence, "except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirement of --", how do you reconcile the use of the phrase, "to the extent that"?

In English (I'm a retired English teacher) that phrase means, "as far as", or more technically, "to the farthest range".

Note that the sentence,

"except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirement of --"

does not have the same meaning as the sentence,

"except that such term shall not include any transaction which includes expenses properly allocable to such transaction meet the requirement of --"

In the first sentence it appears that they are talking about "expenses", while in the second sentence is talking about the "transaction".

The meaning of the first sentence would be, "except that such term shall not include any transaction (as far as) expenses properly allocable to such transaction meet the requirement of --"

In other words it looks like by using the phrase, "to the extent", they are separating out certain expenses from the transaction.

I suspect that they have improperly used the phrase, but just wondered what your take on it would be.

Link to comment
Share on other sites

Hi Mark. First, thanks for your research. I have a question for you (please understand that I am not disagreeing with you, just trying to sort out the verbiage). As an attorney you know that every word in the legal world has meaning. My question is, in the sentence, "except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirement of --", how do you reconcile the use of the phrase, "to the extent that"?

In English (I'm a retired English teacher) that phrase means, "as far as", or more technically, "to the farthest range".

Note that the sentence,

"except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirement of --"

does not have the same meaning as the sentence,

"except that such term shall not include any transaction which includes expenses properly allocable to such transaction meet the requirement of --"

In the first sentence it appears that they are talking about "expenses", while in the second sentence is talking about the "transaction".

The meaning of the first sentence would be, "except that such term shall not include any transaction (as far as) expenses properly allocable to such transaction meet the requirement of --"

In other words it looks like by using the phrase, "to the extent", they are separating out certain expenses from the transaction.

I suspect that they have improperly used the phrase, but just wondered what your take on it would be.

What a wonderful argument to make. I am not nearly as conversant in the English languge as you. I had no idea this phrasing could be made into a legal issue. Every tax attorney should consult a retired English teacher.

Before I get into what I originally planned to post in response, I'd like to analyze your post just a little and take it further. Accepting what you have said about the phrase, "to the extent that" as truth, it actually seems that it is the more correct of the two phrases you present. If the IRS chose to say, "any transaction which includes expenses properly allocable ...," it would limit the scope of the transactions that the law would affect to those that actually "include" the expenses. I believe (as I will discuss below) that the IRS intended to include transactions to the greatest extent possible. If there were ever an expense associated with the transaction, using the underlying transaction as the measuring stick, would that expense be deductible under either section 212 or 162? If the answer is yes (again, based on the underlying transaction as the measuring instrument) then the underlying transaction is excepted from being called a "Personal Transaction."

If I might take a little bit of artistic/legal license with what you have provided, perhaps I can make my point more clearly.

I will begin with the technically correct, "to the farthest range" and change it to read, "in the broadest understanding." Then I will rearrange the sentence to be able to accept the phrase and add my own explanatory embellishments. Therefore, what once read --

"except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirement of --" will now read

"except that such term shall not include any transaction where expenses in the broadest understanding (whether or not incurred) that would be properly allocable to such transaction either do or would meet the requirement of --"

I know I took it a bit far, but it is my belief that is what the IRS intended.

Now I'll get to the answer I had originally intended to use. This answer may be a bit of overkill. However, it deals with the broader question of, "I don't think I had any expenses allocable to the transaction. Doesn't that mean it's capital gains for me?"

The central issue isn't set on whether or not you deducted or even if you can deduct deduct a single expense like the transportation costs. The real issue is intent. The law is written to show intent.

(The following is not meant to be authoritative by any stretch of the imagination and still leaves lots of "wiggle room" to work with if you have the inclination. I will simply be stating what my research and experience tells me the IRS position will be. The IRS position may or may not stand up when challenged at law.)

To support this I will first refer you to the Vernon K. Jacobs article to which I make reference in my initial posting on this topic.

"The general rule with regard to the U.S. tax treatment of gains or losses from exchanging U.S. currency for non U.S. currency (and back) is that the gain or loss on the currency exchange will now be taxed the same as the underlying transaction." (Paragraph one at the following link:)

http://www.maximadvisors.com/knowledge-library/US-Taxation-Foreign-Currency-Gains-Losses.html?q=knowledge-library/international-tax-planning/US-Taxation-Foreign-Currency-Gains-Losses

If the underlying transaction is a gift it would receive different treatment then if the underlying transaction is obviously an investment. The language in section 988(e)(3) should be construed in this light. It is written to capture the nature/intent of the underlying transaction. Therefore, 988(e)(3) should not be thought of attempting to capture or exclude specific expenses of the transaction but generally construed so that if the nature of the transaction is such that if there were any "expenses properly allocable to such transaction," they would meet the requirements of section 212 or 162. Thereby you capture all transactions that are investment in nature (section 212) or business in nature (section 162).

The IRS demonstrates its intent to take the above position in examples they give in the regulations drafted supporting section 988. (The following referenced regulations can be found here:)

http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A%2C_Sec._1.988-1

(Though this is not the question at hand I will share this because it comes up a lot.) The regulations show that the IRS views simply exchanging currency as a section 988 transaction whether by an individual or corporation. If you will look at examples provided in 1.988-1(a)(6) you will find that a corporation simply exchanging to foreign currency and disposing of that currency is classified as a "Section 988 Transaction."

(now back to the question at hand)

There is a good example from the regulations demonstrating that the IRS views an individual using foreign currency as in investment as ordinary income and not just being a "Personal Transaction". You will note that no specific mention is made of any section 212 expense or section 162 expense. However, the intent of the transaction is clear. It is found in regulation 1.988-1(a)(11).

The example is given of a U.S. individual who used 100,000 USD to get Swiss Francs which have appreciated in value relative to the dollar and are now worth $400,000. To avoid the tax consequences of ordinary income, instead of exchanging the currency the individual (B ) contributed the Francs to B's own corporation and then sold the stock in the corporation for the $400,000. B tried to get away with claiming capital gains treatment for selling stock. The IRS came in and reclassified the stock sale as ordinary income because all of the value of the sale was based on the underlying section 988 transaction. (When you attempt to use a series of transactions to get out of a particular tax ramification the IRS refers to it as a "step transaction" and they will remove all of the middle steps. It's one of those, "If it looks like a duck and walks like a duck . . ." sort of things.)

To summarize - specific issues dealing with section 212 and whether it would apply to a particular expense is (in my opinion) not going to matter. The issue is whether the underlying transaction is of an investment nature and therefore, any expenses (whether or not realized) would generally be deductible under section 212. (Of course I realize that I have not shown any legal precedent that settles the matter and I am not willing to pay for the legal research on this topic at this time to see if there is any.)

Though many individual's questions have given me pause for thought, I always come back to the belief that the IRS is looking for the intent of the underlying transaction.

Sorry if that got too long winded. I attempted to use your post to deal with a question that often comes up. I hope it will be helpful to some.

Best of Blessings,

Mark

Edited by ExecConsult
Link to comment
Share on other sites

When I was going through my undergraduate degree, I wrote a paper for my tax law class about how the US Income Tax is unconstitutional. I still believe it may be, but that really doesn't matter because the Courts don't think so. I am not willing to place my own peace and freedom or the peace and security on the line to fight a battle with the Courts over taxes. Following is a website that tracks cases of high profile tax protesters through their eventual incarceration. Enjoy:

http://www.quatloos.com/Q-Forum/viewforum.php?f=30&sid=14d42191ad0f087964a016e8b3d721ab

Best of Blessings,

Mark

Think of it as a social network that relies on your participation.

1910 Aldrich fails to get the original Federal Reserve Act passed. it was then called the Aldrich Act

1913 The Owens Glass Act passes. the Federal Reserve is born

1917 The IRS is hatched under somewhat cloudy circumstances.

Somewhere in FDR's regime the Ponzi scheme known as Social Security falls from the sky..

We now have the ultimate brothel...

Aldrich was dispatched with the duty of writing leglislation to insure America would never be under the control of a Central Bank.

Being a good congress critter, he created leglislislation to form a Central Bank.

We now had a pimp.

All pimps need prostitutes, so the Federal Reserve rises to the task.

Now, all we need are Johns to foster the largest whorehouse in history.

The way the brothel works is this --- The Fed prints the money.

It is loaned into the economy with compound interest.

We can provide the principal with the fruits of our labors, but the interest requires a tax.

We have to self access ourselves a tax, unless we give up the sovereignity of State Citizenship.

Social Security steps up to the plate and makes us Federal Pensioners, and forces us to give up our rights as State Citizens.

Now, we are classified as taxpayers; a term that Webster never saw coming.

So, we are the johns, social security is the prostitute, the IRS is the cashier and the Fed is the pimp.

all need each other to survive.

We foot the bill.

Sleight of Hand at it's best...

Whew, tough to post using a touch screen...

Treat as fiction, do your own research. A more sordid subject was never created..

  • Upvote 3
Link to comment
Share on other sites

  • 1 month later...

Does this web information pertain to to us?

http://www.traderstatus.com/forex.htm 

?? sorry for the miss understanding i am new to this and have only purchased stocks.

a simply the section we have to file in for taxes.. after reading the above information I am a little lost. thanks sorry for the inconvenience people.

Link to comment
Share on other sites

  • 3 weeks later...

Does this web information pertain to to us?

http://www.traderstatus.com/forex.htm 

?? sorry for the miss understanding i am new to this and have only purchased stocks.

a simply the section we have to file in for taxes.. after reading the above information I am a little lost. thanks sorry for the inconvenience people.

My research leads me to believe that this does not apply to us. This deals with trading in contracts instead of physical assets.

Blessings,

Mark

Link to comment
Share on other sites

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.)

So what would the tax rate be for Ordinary income, I assume the tax bracket is determined by the amount of income?

thanks :)

  • Upvote 1
Link to comment
Share on other sites

You are correct, the tax rate for Ordinary Income is based on the amount of income you make. It is a graduated rate which means you pay a lower rate on the first dollars that you earn and higher rates on income that spills over into the bigger and bigger brackets. The highest bracket is 35%. I assume that most dinar investors will end up with at least some (if not most) of their income being taxed in this bracket for Ordinary Income.

Best of Blessings,

Mark

  • Upvote 1
Link to comment
Share on other sites

It would appear you are making this way too complicated.

Seems to me the IRS had made this perfectly clear here:

Page 33, of your own link: http://www.irs.gov/pub/irs-pdf/p525.pdf

Clearly states the following:

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.

As you can see above, it Clearly states in Publication 525 for Taxable and non-taxable income that If your gain is more than $200, "REPORT IT AS A CAPITAL GAIN."

Don't see how it could be much clearer.

gridkeeper

Okay, I can see now where others cleared this up earlier. I was responding to the so-called 'tax expert' that argued it was ordinary income.

IRS itself says it ain't so.

gridkeeper.

  • Upvote 1
  • Downvote 1
Link to comment
Share on other sites

It would appear you are making this way too complicated.

Seems to me the IRS had made this perfectly clear here:

Page 33, of your own link: http://www.irs.gov/pub/irs-pdf/p525.pdf

Clearly states the following:

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.

As you can see above, it Clearly states in Publication 525 for Taxable and non-taxable income that If your gain is more than $200, "REPORT IT AS A CAPITAL GAIN."

Don't see how it could be much clearer.

gridkeeper

Okay, I can see now where others cleared this up earlier. I was responding to the so-called 'tax expert' that argued it was ordinary income.

IRS itself says it ain't so.

gridkeeper.

I can only assume your reference to a "so-called 'tax expert'" was to my posts above. I am 100% with you that is what the publication you linked to says.

It's true that could be the way the IRS ends up assessing taxes on our dinar investments. However, if you do a little bit more research you will discover

1) The publication you linked to is not authoritative (you can not rely on it to support your position in tax court)

2) The part of the publication you are referring to is a direct quote from section 988 (which is authoritative)

3) That quote is a very limited exception to the rule (not the rule itself)

4) That exception is carved out primarily for people who are exchanging currency in their travels

5) Because we hold dinar as an investment (instead of typical personal use like travel) the exception may or may not apply to us

6) Tax professionals come down on both sides of the argument

I believe that under current IRS views we will not qualify for the exception and have to pay ordinary income taxes. However, I'd like to get the IRS to change their minds.

Best of Blessings,

Mark

P.S. If you want to see what I argued to the IRS "should" be the case, here is a link where I posted it on the forum:

Read more:

Link to comment
Share on other sites

  • 2 months later...

I am very confused:

If the IRS itself is saying that it is capital gains, then why is someone trying to argue against them?

Mark, meaning no disrespect here, but you do sound like you are going out of your way to give the IRS an argument they do not now have.

And it makes no sense. You, yourself, in one of your posts below, admits this is an asset. So if you sell an asset how can you possibly call the proceeds ordinary income and report it as 'interest income'? This looks like falsification of IRS documents to me :unsure:

You, yourself have admitted that there is absolutely NO direct IRS code which covers this as ordinary income. Yet there is MUCH to say that it is Capital Gains.

I am going to include this here as well in case some miss it below:

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

Copied from One Dinar

A Call to the IRS 03/14/2011 posted by Trac

EdwardK on Tue Mar 29, 2011 4:37 am

A Call to the IRS 03/14/2011 posted by Trac

I called the IRS yesterday with a couple of questions.

After spending approximately 15-20 minutes on hold I got to talk to a Mr. Kirk ID# 5906613. When you call 1-800-829-1040 you should ask for the Complex Individual Issues.

I spent approximately 30-40 minutes with Mr. Kirk, a very nice man of which answered my question very well.

1. The first question of number one on most of our lists which concerned just how are we to be taxed on our currency transaction. He mentioned (2) publication that he would be using to answer this question. Pub 525 and Pub 550. His first question to me was did I purchase the foreign currency using a futures contract and then also mentioned 1256 contracts. I said no contracts. I then went on to explain exactly how I purchased my foreign currency, that it was sent to me from a foreign currency dealer here in the United States via Federal Express and I paid for it using a money order. He said if my gains were less than $200 then I would not owe any taxes. I said it will be over $200 gain. He then said you will be taxed as capital gains. I asked him what the tax rate would be ? He asked me when did I purchase the currency and I told him. In my case I have held my currency for well over a year. I told him I had been told that it could possibly be regular income ? His reply was no - Capital Gains. I asked him what publication and paragraph would I use ? He lead me to Pub 525 on the internet and page 33 of that publication then had me find Foreign Currency Transactions.

I asked him so what is that Pub 550 you had mentioned ? He said that is if you purchased your currency using a futures contract. I said I did not do anything like that. He said then you will file this transaction on Schedule D - Capital Gains and Loses.

Note: I did mention what about a getting a certified letter of opinion ? He said the cost of those start at around $1000.00 - there is no need for you to have anything like that. This currency transaction you have made is simply Capital Gains.

2. My second question was on the gifting. I stated out with gifting US currency and tried to get information about the lifetime gifting increase. The $5,000,000 lifetime gifting does not come into play the way it was previously explained to me. If you wish to gift US currency either keep it under the $13,000 gift exclusion. If you gift over the $13,000 exclusion the amount over the exclusion will be deducted from your lifetime gifting of $1,000,000. The $5,000,000 does not come into play at all with this gifting even though it is included in your estate lifetime your lifetime gifting exclusion over and above the $13,000 exclusion is still $1,000,000. I used the example that if I gifted one of my childrean $15,000 how will I be taxed on it if I have not used any of my lifetime gifting. He said I would file on the $15,000 gift - then subtract the $13,000 exclusion and the $2000.00 would be deducted from my $1,000,000 lifetime exclusion. Once I have exceeded my $1,000,000 total lifetime exclusion I would have to pay gifting tax of approximately 35% for any amount gifted from that time on that was over the $13,000 gift exclusion. So I asked him when my lifetime exclusion is used up I can still gift the $13,000 per year per person without having to pay any gifting tax ? He said that is correct. But if in a years time you gift to any one person over the $13,000 exclusion you will owe a gift tax on the amount that exceeds the $13,000.

3. My third question was at what amount does the recipient of the gift has to pay any taxes on the money they receive as a gift. He was a bit of a comedian and said they would enter that amount on there tax return where they enter their Christmas gifts. I am a little slow sometimes but did not take me long - and I said so they never have to file the gift on their tax return regardless of what the amount is ? He said that is correct.

4. My fourth question was if I gift the foreign currency to my children and I will use the example of : At the time I gift the foreign currency to my children it is worth $100 but when they sell it how will they be taxed on it ? He said capital gains. So I said do I give them some kind of letter or what to show when I gave it to them and how much I paid for it. He said yes they will need a paper trail of where the money came from and what the basis was on it. I said do I need to have this notorized ? He said no - and followed with the question - Is your tax return notorized. I said no. He said the paper trail does not need to be notorized either. So I gave him another example : If I wrote a letter stating the amount of the foreign currency - the price I paid for the currency and the date that I gifted the foreign currency and attached the receipt of my purchase of the foreign currency to show I actually gave them the gift after my proof of purchase date, would that be sufficient ? He said that would be fine. I said so what tax rate would they have to pay ? He said it would depend on how long they actually held the foreign currency.

Well I thanked him sincerely for his time and information and we said goodbye.

Take this for what it is worth to you. I don't care to debate this with anyone. I am only trying to pass on my actual experience with the IRS that I had today.

If you call the IRS at 1-800-829-1040 you should ask for the Complex Individual Issues.

I believe why some are getting conflicting answers from the IRS is because they are all calling different departments and the people are experts only on those particular issues.

_________________

Continued from Trac

I have heard so many conflicting stories as to how we will be taxed on this investment. I finally decided to call the IRS myself. And you can do this too just for peace of mind if nothing else.

When you call 1-800-829-1040 you should ask for the Complex Individual Issues.

If you do get any other answers other than what I was told please mention this publication 525 and in that page 33. Foreign Currency Transactions

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

Page 33 Foreign Currency Transactions

There will be some of us with such a low income that may even not have to pay any tax on this investment. This gets far more complicated and will require you to fill out the Schedule D - Capital Gains and Losses for your individual situation.

Then you will use the Schedule D Tax Worksheet located in the Instructions for Scheduled D.

http://www.irs.gov/pub/irs-pdf/i1040sd.pdf

We will still owe whatever state tax we have on this investment too but still this is far better than paying our regular income tax rate, especially if you have been holding your dinar for more than a year.

justpassntime, your post just above is 100% correct. I teach taxes and the agent is correct about the Section 988 requirement of the futures contract. Until any new tax changes come out, and at least 1 a week crosses my desk, concerning Capital Gains/Loss then the information and charts you have shown will apply. Any other information is rumor until it becomes fact (or law in this case).

May God bless and keep you.

  • Upvote 1
Link to comment
Share on other sites

I am very confused:

If the IRS itself is saying that it is capital gains, then why is someone trying to argue against them?

Mark, meaning no disrespect here, but you do sound like you are going out of your way to give the IRS an argument they do not now have.

And it makes no sense. You, yourself, in one of your posts below, admits this is an asset. So if you sell an asset how can you possibly call the proceeds ordinary income and report it as 'interest income'? This looks like falsification of IRS documents to me :unsure:

You, yourself have admitted that there is absolutely NO direct IRS code which covers this as ordinary income. Yet there is MUCH to say that it is Capital Gains.

I take no offense at your post. I can see that you are trying to understand this and I can see why you would feel the way that you do. I'll do my best to address your comments clearly and succinctly.

Issue - Sale of asset --

Your money is an asset. Interest earned on that money is also an asset. The IRS would refer to your IQD as "nonfunctional currency" because it is money but not the money you can normally do business with in your country of residence. Still, the IRS sees it as money. When you exchange it for other money (whether foreign or domestic) they don't look at it as a "sale" of your money. They look at it as an appreciation of your money; like interest. Under section 988 it states the following:

Section 988 (a )(2 )

"To the extent provided in regulations, any amount treated as ordinary income or loss under paragraph (1) shall be treated as interest income or expense (as the case may be). "

Issue - No direct IRS code --

Above you said

You, yourself have admitted that there is absolutely NO direct IRS code which covers this as ordinary income. Yet there is MUCH to say that it is Capital Gains.

If I ever gave the impression that is what I believed, I communicated terribly. My apologies. I believe the reverse is closer to the truth. Section 988 as a whole provides that income and loss from currency exchanges should be reported as ordinary income. It is only under specific exceptions where people get to deviate from this proposition.

Section 988 (a )(1 ) states:

"Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be)."

Within the actual law and supporting regulations the overwhelming weight is for the prospect that currency exchanges are in fact ordinary income. So why is there any argument and why do we so "MUCH" to say that it is Capital Gains? I'll answer that as well.

Argument amongst professionals -

All of the professionals with whom I have communicated directly agree that the IRS' position is that this is ordinary income. My most recent communication was with Robert A. Green, the CPA who did the following Forbes article:

http://www.forbes.com/sites/greatspeculations/2011/07/27/is-the-iraqi-dinar-worthless-paper-or-maker-of-millionaires/ . I also had email communication with the tax attorney with whom Mr. Green worked prior to writing the piece.

I have run across a few instances where a CPA will say they think it is Capital Gains on the forum, but very few. The only argument is whether or not this personal exception mentioned in publication 525 pg. 33 actually applies to those who have purchased dinar as an investment. The entire thing hinges on one tiny phrase, “expenses properly allocable to such transaction meet the requirements of.” Among professionals this is the pin upon which all analysis hinges.

So MUCH to say capital gains -

The only "so MUCH" out there is the fact that the same thing gets repeated over and over again. The exception to the rule that is quoted in publication 525. It all leads back to that. I discuss this more in the link listed below.

I firmly believe that an analysis of the law, regulations, and legislative history indicate that the IRS' current position is that any income derived from foreign currency purchase with a business or investment intent will be taxed as ordinary income. However, in my submission to the IRS I argue the other side of the coin and suggest that it is not appropriate to attempt to tax the income as ordinary income unless the person has actually claimed a deduction for a business or investment expense related to the foreign currency. A post containing this submission can be found here:

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

Copied from One Dinar

A Call to the IRS 03/14/2011 posted by Trac

EdwardK on Tue Mar 29, 2011 4:37 am

A Call to the IRS 03/14/2011 posted by Trac

I called the IRS yesterday with a couple of questions.

After spending approximately 15-20 minutes on hold I got to talk to a Mr. Kirk ID# 5906613. When you call 1-800-829-1040 you should ask for the Complex Individual Issues.

I spent approximately 30-40 minutes with Mr. Kirk, a very nice man of which answered my question very well.

1. The first question of number one on most of our lists which concerned just how are we to be taxed on our currency transaction. He mentioned (2) publication that he would be using to answer this question. Pub 525 and Pub 550. His first question to me was did I purchase the foreign currency .................. . . . Remainder Deleted to Save Space . . . . This information can be seen above. . ..

I am not going to attempt to take the time to address everything in this post. I will only address what I feel is most critical for people to understand.

When this came up the first time, I wanted to illustrate a point so I called the IRS myself and spoke with a gentleman in the "Complex Individual Issues" department. When I began telling him the issue, he stopped me and told me that that they were not supposed to answer questions regarding gains on foreign currency exchanges. I told him I was an attorney and told him what Mr. Kirk had said. His response was that they have a list of items they are not supposed to attempt to answer. Foreign currency transactions are on the list. They are considered "outside the scope" of their department. He went on to tell me that it was unfortunate that most of the people did not refer to that list before trying to answer the questions. Previous to this phone call, I also tried to use their email Q&A service and got the same "outside the scope" response.

So basically Mr. Kirk has not been trained to appropriately address these issues, is not supposed to be answering these questions for which he is not qualified, and can not be relied upon. I can hear a lot of you now saying that I am being too harsh and that just because he was not officially supposed to answer, he certainly knew what he was talking about and had the documents to back him up. Lets discuss that next.

IRS Publications are NOT the LAW

Over and over again, Publication 525 Pg. 33 is quoted as definitive proof that our investment will be taxed as capital gains. On the surface it certainly seems like an open and shut case. However, nothing is EVER that easy with the IRS.

IRS publications are not binding on the Service. They are printed to give help and guidance. Tax professionals have known (or should have known this for a long time. Note the following from a case back in 1978.

"It is unfortunately all too common for government manuals, handbooks, and in-house publications to contain statements that were not meant or are not wholly reliable. If they go counter to governing statutes and regulations of the highest or higher dignity, e.g. regulations published in the Federal Register, they do not bind the government, and persons relying on them do so at their peril." [emphasis added] Caterpillar Tractor Co. v. United States, 589 F.2d 1040, 1043, 218 Ct. Cl. 517 (1978)

This is what the IRS has to say about the quality of the information they put out to help you:

This guidance should be used to ensure and maximize the quality of disseminated information. The Internal Revenue Service’s guidelines are based on the Office of Management and Budget (OMB) guidelines published in the Federal Register on September 28, 2001, January 3, 2002, and February 22, 2002. These guidelines, as the name suggests, are in the nature of guidance. They are not intended to be, and should not be construed as, legally binding regulations or mandates. They are not legally enforceable and do not create any legal rights or impose any legally binding requirements or obligations on the agency. Nothing in these guidelines affects any otherwise available judicial review of agency action.

So, you see -- as important as the "Complex Individual Issues" department sounds, it is just a little higher level of the call center in the customer service department. Not only are they not trained or qualified to answer the questions about foreign currency transactions, if they do, you can not rely on what they told you. The IRS doesn't care. What the customer service department employees tell you does not matter.

Section 988 is the LAW

The taxes for profits and losses from foreign currency transactions are controlled by Section 988 of the Internal Revenue Code. (What publication 550 refers to is the ability to "opt out" of 988 control to Section 1256 for foreign currency "contracts." This doesn't apply to us because we are not purchasing forex contracts.) What is found in publication 525 on page 33 is, in fact, mostly a quote from section 988. However, it is only a quote for an exception written into the law for people who do foreign currency exchanges for personal purposes like travel. What the publication fails to point out is that the very next subsection in the actual LAW gives a very limiting definition of what can be considered a "personal transaction" to be able to take advantage of the exception to the rule.

My analysis of the law after research and consulting with IRS tax professionals and private tax professionals is that as of today, the IRS' position is that anything done with a business or investment purpose/intent will not qualify for this "personal transaction" exception to the rule. Therefore, they will be taxed at ordinary income levels instead of as capital gains. I made a more complete post of my analysis. It can be found here:

Is this final? Well . . . not really. I do believe that it is fairly difficult to overcome. However, the IRS has not addressed one phrase in the law very directly and it "could" give someone wiggle room to at least attempt to claim capital gains treatment. However, I believe to do so invites a guaranteed audit and I believe you will most likely lose. Still, I am an attorney and though we council our clients one way, we may argue on the client's behalf another. I did a submission to the IRS requesting guidance where I argued for capital gains treatment. I did a post on it which can be found here:

I hope you find this to be helpful.

Best of Blessings,

Mark

P.S. See my profile for a shortened professional disclaimer

Edited by ExecConsult
  • Upvote 2
  • Downvote 1
Link to comment
Share on other sites

I just realized that I never answered your initial question --

I am very confused:

If the IRS itself is saying that it is capital gains, then why is someone trying to argue against them?

Two things -

1) The most important reason is so that people don't make decision based on incomplete or incorrect information and then get burned. It is much better to hear it from me now then to hear it from an auditor later.

2) The "IRS Itself" does NOT say that our investment should be taxed as capital gains. The only place that anything is said about taxing foreign currency transactions as capital gains is that one exception to the rule which is repeated in Pub. 525. Just because that is what a bunch of untrained phone bank operators look up Pub 525 and repeat it over and over again does not make this the official position of the IRS. The IRS people who actually make decisions about this stuff that I have heard from agree that Pub. 525 does not apply to us. It was written for travelers who exchange currency for the purposes of their travel and other incidental personal reasons (NOT business and investment reasons).

Best of Blessings,

Mark

Edited by ExecConsult
Link to comment
Share on other sites

  • 3 months later...

I've been following the discussions on income vs capital gains reporting for the IRS, but have a different question on it.

I was given 10 25,000 IQD as a gift from a very generous brother-in-law. My sister passed away a few years ago from melanoma, but we have all remained close.

It is my intention to give 1 of these 25,000 IQD notes to a Christian foundation I worked for for 17 years once it RVs. It will be to a donor-advised fund I set up some years ago. Thus, I will not have to pay the taxes on that 25,000 IQD and neither will they. However, if I understand your postings correctly if I had purchased these dinars myself, I would owe taxes as normal income on the remaining ones once I cashed them in. But since I received them as a gift, would I then only owe capital gains taxes on the difference in the value from the time I received them till the time I cashed them in?

And thanks! You do good work. :rolleyes:

cdg

Link to comment
Share on other sites

The IRS would be very hard pressed to say that you had any investment intent in the way you acquired your dinar (as a gift). The real question is how far do they want to push the issue. When I had a friend of mine at the IRS check with an International Examiner that she works with we all agreed that a gift of foreign currency could only be taxed as capital gains. However, since that time I have done more study that causes me concern enough that if I had a client claiming capital gains I'd at least warn them. Let me try to brake it down as simply as I can.

The way the law is written and the purpose (intention) of the law don't necessarily match up.

INTENT OF THE LAW

The intent of the law as shown by the regulations and legislative history is to capture everything that is of a business nature or investment nature and charge ORDINARY INCOME.

LANGUAGE OF THE LAW

The way they try to capture that intention is by saying:

1) Income from disposition of nonfunctional currency is Ordinary Income (translated it means that income from exchanging or spending foreign currency would be ordinary income)

2) If you are simply traveling or have other "Personal Transactions" they cut you a brake and say you can claim CAPITAL GAINS treatment for income.

3) If you have section 212 or section 162 deductions (that is investment or business deductions) relating to the currency then you can not claim that it is merely a "Personal Transaction." You don't get the exception and you still have to pay taxes as ORDINARY INCOME.

Number 3 is where all the confusion lies. We know what the IRS' intentions are. However, the way the law is written is very ambiguous. They may try to interpret it in such a way as to claim that any transaction where a section 212 deduction "could have been claimed" still qualifies your income as ORDINARY INCOME. If they do this then it is possible that even dinar income received as a gift might not escape the claim. I want you to understand that is stretching it quite a bit, but I would not put it past the IRS to attempt it.

IF I WERE IN YOUR SHOES

In your circumstances you have the best claim possible to Capital Gains. I'd take it. If the IRS challenged it I'd fight them tooth and nail and I think you have a good chance of prevailing in Federal Tax Court. My personal opinion is that the IRS may try to claim that it is Ordinary Income but if they do I think they would lose in Court.

I hope that is helpful and not too confusing.

Best of Blessings,

Mark

Edited by ExecConsult
Link to comment
Share on other sites

The bottom line is that currency investment is "ordinary income" and you will be subject to more than 50% federal tax alone (including 15.3% SE tax) SEE IRS tax code 988. If you call the business hotline 1-800-597-9252 they will show you how to legally structure your Iraqi dinar investment properly to reduce your tax burden. I work there and I talked to the Lawyers and the CPA's and they recommend this strategy and it is completely legal.

  • Upvote 1
  • Downvote 1
Link to comment
Share on other sites

The bottom line is that currency investment is "ordinary income" and you will be subject to more than 50% federal tax alone (including 15.3% SE tax) SEE IRS tax code 988. If you call the business hotline 1-800-597-9252 they will show you how to legally structure your Iraqi dinar investment properly to reduce your tax burden. I work there and I talked to the Lawyers and the CPA's and they recommend this strategy and it is completely legal.

You will not have to pay SE tax on this because it is not an operating business. Even if you set up an LLC for asset protection and place the dinar in it you will not have to pay the SE tax because it is not an operating business (or if it is the dinar is not related to the operations). So - you don't have to worry about the SE tax - however you will have Federal and state taxes.

IMPORTANT NOTE

IF you have state income tax you really should pay the taxes on any dinar income as ESTIMATED TAX PAYMENTS in the year earned so that you can deduct them on your federal taxes. It will save you 35% of the amount paid on state Income taxes.

Link to comment
Share on other sites

  • 1 month later...

ExecConsult, Wow I have given this a lot of reading time to try and understand the full nature of Capital Gains and Ordinay Income. I have many friends who have Dinar investments and they are totally convinced that it is Capital Gains. I have informed them to read this topic and head the info accordingly. I myself will follow good and sound advice as I deem yours to be. Thanks

Link to comment
Share on other sites

ExecConsult, Wow I have given this a lot of reading time to try and understand the full nature of Capital Gains and Ordinay Income. I have many friends who have Dinar investments and they are totally convinced that it is Capital Gains. I have informed them to read this topic and head the info accordingly. I myself will follow good and sound advice as I deem yours to be. Thanks

I'm grateful that I have been able to be of some help. You might also like to read (and/or refer your friends to) the following tax analysis of the dinar situation:

http://whatisiraqidinar.com/dinar-income-tax-analysis

This is my most recent work on the subject. In it I include the opinions of other professionals. I also tried to make it as understandable as possible.

Best of Blessings,

Mark

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
 Share

  • Recently Browsing   0 members

    No registered users viewing this page.

×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.