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Dinar Taxes - Attorney Breaks It Down


ExecConsult
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Hi Mark,

Thanks for that, I just get lost after the first example, for me I need to know what % I will be taxed. Am I safe thinking 50% will go to Tax, I know it's probably not that simple, it's designed that way. But I can say I'm considering to leave the US for a couple of years if the tax due is much greater than 50%.

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Dive into it Mark. Keep posting detailed info, feelings, knowledge, comparisons. Whatever. Please, your HELP is good! This is the new direction and main thrust I feel. Now that some day the RV, will actually be yesterday's news. YES to ALL SHARING ADVICE, NEWS, and RULES OF COMMON SENSE.

I give you a + 1

... cuz this TOPIC will be where I'll be spending more and more time. Once I pick up my jaw from the floor.

Bless you!

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Thanks Mark,

I don't disagree with any of your statements above and I appreciate you putting it all together. However, I'm not sure that our "investment" qualifies as a "Section 988 transaction".

§ 988. Treatment of certain foreign currency transactions

(a) General rule Notwithstanding any other provision of this chapter— (1) Treatment as ordinary income or loss <a name="a_1_A"> (A) In general 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).

If our "investment" is not a section 988 transaction, then it would strictly be a normal investment which would fall under Capital Gains.

Section 988

book_icon.jpgWhat Does Section 988 Mean?

A financial transaction involving a capital loss or gain on an investment held in a foreign currency. A Section 988 transaction relates to IRS Section 988, which was applied to all tax years after December 31, 1986. Per IRS rules, most gains from foreign currency transactions are to be treated as ordinary income, whether earned by an individual or a corporation. Gains and losses from these transactions are typically viewed outside of any gain or loss due to exchange rate changes between the U.S. dollar and the foreign currency. 988 Transactions include those surrounding holders of foreign bonds (who will receive interest and principle in a domestically "nonfunctional" currency), foreign currency futures or other derivatives, as well as accrued expenses or receipts in a foreign currency.

My link

My view on this as a NON expert is that: Section 988 transactions are gains or losses on investments HELD in a foreign currency or gains or losses in foreign currency futures or bonds. NOT where the cash currency is the investment.

Not saying I'm right, just food for thought as a counter to your thoughts.

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Thank you for your time and effort on this topic. I'm sure that this weighs almost as heavy on most peoples minds as the RV.

Thank you for your time and effort on this topic. I'm sure that this weighs almost as heavy on most peoples minds as the RV.

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Thanks Mark,

I don't disagree with any of your statements above and I appreciate you putting it all together. However, I'm not sure that our "investment" qualifies as a "Section 988 transaction".

§ 988. Treatment of certain foreign currency transactions

(a) General rule Notwithstanding any other provision of this chapter— (1) Treatment as ordinary income or loss <a name="a_1_A"> (A) In general 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).

If our "investment" is not a section 988 transaction, then it would strictly be a normal investment which would fall under Capital Gains.

Section 988

book_icon.jpgWhat Does Section 988 Mean?

A financial transaction involving a capital loss or gain on an investment held in a foreign currency. A Section 988 transaction relates to IRS Section 988, which was applied to all tax years after December 31, 1986. Per IRS rules, most gains from foreign currency transactions are to be treated as ordinary income, whether earned by an individual or a corporation. Gains and losses from these transactions are typically viewed outside of any gain or loss due to exchange rate changes between the U.S. dollar and the foreign currency. 988 Transactions include those surrounding holders of foreign bonds (who will receive interest and principle in a domestically "nonfunctional" currency), foreign currency futures or other derivatives, as well as accrued expenses or receipts in a foreign currency.

My link

My view on this as a NON expert is that: Section 988 transactions are gains or losses on investments HELD in a foreign currency or gains or losses in foreign currency futures or bonds. NOT where the cash currency is the investment.

Not saying I'm right, just food for thought as a counter to your thoughts.

That is a good point. I'm glad you brought it up. Unfortunately, you are pulling your quote from some guy out there who wrote it for the general public. It is not detailed enough. Allow me to shed some light on the subject from Section 988 itself: (Note - nonfunctional currency refers to currency that can not be used as such in the US i.e. Not US currency)

Section 988©(1)

© Special rules for disposition of nonfunctional currency

(i) In general In the case of any disposition of any

nonfunctional currency--

(I) such disposition shall be treated as a section 988

transaction, and

(II) any gain or loss from such transaction shall be treated

as foreign currency gain or loss (as the case may be).

(ii) Nonfunctional currency For purposes of this section, the

term "nonfunctional currency" includes coin or currency, and

nonfunctional currency denominated demand or time deposits or

similar instruments issued by a bank or other financial institution.

Note that it that disposition of a nonfunctional currency (your Dinar) "shall be treated as a section 988 transaction."

Keep Digging,

Best of Blessings,

Mark

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That is a good point. I'm glad you brought it up. Unfortunately, you are pulling your quote from some guy out there who wrote it for the general public. It is not detailed enough. Allow me to shed some light on the subject from Section 988 itself: (Note - nonfunctional currency refers to currency that can not be used as such in the US i.e. Not US currency)

Section 988©(1)

© Special rules for disposition of nonfunctional currency

(i) In general In the case of any disposition of any

nonfunctional currency--

(I) such disposition shall be treated as a section 988

transaction, and

(II) any gain or loss from such transaction shall be treated

as foreign currency gain or loss (as the case may be).

(ii) Nonfunctional currency For purposes of this section, the

term "nonfunctional currency" includes coin or currency, and

nonfunctional currency denominated demand or time deposits or

similar instruments issued by a bank or other financial institution.

Note that it that disposition of a nonfunctional currency (your Dinar) "shall be treated as a section 988 transaction."

Keep Digging,

Best of Blessings,

Mark

Mark,

In order for you to be correct, our investment has to fit the definition of a "Section 988 transaction".

Here is the definition contained in Section 988:

For purposes of this section— (1) Section 988 transaction (A) In general The term “section 988 transaction” means any transaction described in subparagraph B (cool.gif if the amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction— (i) is denominated in terms of a nonfunctional currency, or (ii) is determined by reference to the value of 1 or more nonfunctional currencies.

B. Description of transactions For purposes of subparagraph (A), the following transactions are described in this subparagraph:

(i) The acquisition of a debt instrument or becoming the obligor under a debt instrument.

(ii) Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account.

(iii) Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument.

I have highlighted in "red" the important parts. I don't believe "our investment" falls into any of the 3 above situations.

All the investments that Section 988 continually refers to are forward contracts, futures contracts, options, bonds etc.

Which makes sense, because that's why Section 988 was written. It was not written for direct purchase of foreign currency, let alone purchase of a foreign currency that is not recognized by the world at large.

I'm not saying that it won't end up being treated that way by the IRS, but I don't believe it fits the definition of Section 988.

Time will tell. The camps seem to be split. Though I will say more seem to be agreeing with your view recently.

Here's hoping for both of us that I'm right. We'll save a few bucks that way.

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Mark,

Your post seems to hinge on the fact you paid fees or what not when getting your dinar from a dealer.... However what about us veterans that did not pay fees and exchanged dinar in Iraq/Kuwait and did not pay any fees it was an actual currency exchange without fees. That would make it a personal transaction and would put us into the Captail Gains category CORRECT?

Iraqi Vet05-07

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AS I GATHER IF LESS THAN ONE YEAR ON INVESTMENT YOU PAY 35% IF MORE THAN A YEAR YOU PAY 15%, BROTHER I AM GLAD

I FALL ON THE 1 YEAR PLUS CATEGORY, THANKS

This is what I also thought, based on Publication 525. Out of curiosity I completed a 2009 tax return using information as if I had completed my 2009 tax return with a Long Term Cap Gain (Schedule D) from the sale of Dinar. The result was that the Alternative Minimum Tax (AMT) kicked in and my 15% Capital Gains rate suddenly went to an effective 28% due to the AMT. But again, the big question is, How do you treat the income, Capital Gains, Ordinary Income, Investment Income etc.

The second item of my curiosity is this. It is my understanding that a very similar scenario took place when Kuwait revalued their Dinar some while back, creating overnight Millionaires under very similar circumstances. Can anyone shed light on how the IRS handled this scenario then? I would think that would be the Precedence.

HELP!

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Mark,

In order for you to be correct, our investment has to fit the definition of a "Section 988 transaction".

Here is the definition contained in Section 988:

For purposes of this section— (1) Section 988 transaction (A) In general The term “section 988 transaction” means any transaction described in subparagraph B (cool.gif if the amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction— (i) is denominated in terms of a nonfunctional currency, or (ii) is determined by reference to the value of 1 or more nonfunctional currencies.

B. Description of transactions For purposes of subparagraph (A), the following transactions are described in this subparagraph:

(i) The acquisition of a debt instrument or becoming the obligor under a debt instrument.

(ii) Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account.

(iii) Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument.

I have highlighted in "red" the important parts. I don't believe "our investment" falls into any of the 3 above situations.

All the investments that Section 988 continually refers to are forward contracts, futures contracts, options, bonds etc.

Which makes sense, because that's why Section 988 was written. It was not written for direct purchase of foreign currency, let alone purchase of a foreign currency that is not recognized by the world at large.

I'm not saying that it won't end up being treated that way by the IRS, but I don't believe it fits the definition of Section 988.

Time will tell. The camps seem to be split. Though I will say more seem to be agreeing with your view recently.

Here's hoping for both of us that I'm right. We'll save a few bucks that way.

bahtman

You are right on the money. In order for me to be correct, it must be a "section 988 transaction." You are also correct that section 988 is constantly referring to foreign currency contracts. You have also quoted the "In general" definition correctly. To really get to the correct analysis, you must understand that under legal construction, when there is a specific instruction it supersedes the general instruction. If there weren't "special rules" applying to the cash out of the Dinar (disposition of foreign currency), your analysis would be correct. However, right after your quote stops, mine starts:

Section 988(c )(1)

(c ) Special rules for disposition of nonfunctional currency

(i) In general In the case of any disposition of any

nonfunctional currency--

(I) such disposition shall be treated as a section 988

transaction[, and . . . .

I know you REALLY, REALLY want it to be capital gains, but it's not. . . Unless . . .

There may be one case where you would be correct. I didn't want to get into it for fear of the "can of worms" it would open, but one of the people who posts later has already mentioned it, so I am going to address it there. What if it was a gift and had no expenses associated that would qualify for Section 212 deductions? See my response to this topic later.

Best of Blessings,

Mark

Edited by ExecConsult
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Simple solution for the ones that are looking to pay as much taxes as possible (Iraq or Kuwait soldiers/contractors) Just tell the H&R Tax guy that you want to pay any and all taxes that they THINK THAT YOU NEED TO PAY and write them a check!! If you are not willing to do that, than stop with the ridiculous questions...Question...Do you just sit around all day and think of dumb questions???

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