Dinars Taxed as regular income versus Capital Gains

[NCTRIGUY]

Adam, this might be an old posting but thought it might be relevant. What do your experts say in regards to this? Wil also post this in the VIP area.

"03-December 10 LocationWichita area Kansas Posted 12 December 2010 -

01:27 PM

Hi, My name is Mark. I'm an estate planning attorney. I've been reading lots of topics and posts on taxes going back and forth. Most indicate that people believe that income from exchanging Dinar for US $ will be treated as capital gains. This is what I used to believe too.

I have read, "I talked to my CPA/attorney about this and they said it would definitely be ___________." (Fill in the blank with whatever you want it to be - I've seen it I think.) Since all professionals know the same stuff <coughing to self>, why don't we all see the same answer. I think there are two reasons. 1) We all know pretty much the same "basics" but not all the same specialized information. Those who think of currency exchange in relation to the basics immediately think, "appreciated asset = capital gains." However, if you know more than the basics . . . (read what follows).

GENERAL ANSWERS FOR ARGUMENTS IN support OF CAPITAL GAINS TREATMENT I will not be at all disappointed if you do not believe or agree with what I post here. After all, a lot of intelligent people are saying otherwise. Here is the link to an article by a CPA, Vernon Jacobs, who seems to have better credentials than I do for dealing with foreign currency (he also charges more than me):

http://www.maximadvi...cy-Gains-Losses

This article makes statements without supporting them. In my analysis, most of the statements made in the article agree with what is written in Section 988 (The section dealing with foreign currency). However, the most important one to us does not seem to agree with section 988.

Why then should we believe Mr. Jacobs if his assertions are not explained instead of just stated? While I agree that this gentleman certainly seems to know what he is talking about and has impressive credentials, when I have so much contrary evidence I can not simply believe him because he said so. I need some sort of reference to the authority upon which he bases his claims. (Who knows - maybe he was having a bad day and just misstated something.)

Maybe you should believe him. (Maybe I should believe him.) Still, I don't feel comfortable being told something and staking so much on it without being told why. When I try to look into "why" I come up with a different result. Many other CPAs also agree with what I am about to share. The most convincing of which I will share at the end of the post.

Another oft mentioned reason for believing that the foreign currency is a "capital asset" that is subject to capital gains taxes is Internal Revenue Code (IRC) section 1221 which says that a "capital asset" is any asset held by the taxpayer except . . . . Nonfunctional (foreign) currency is not listed as an exception. People therefore surmise that if it is a capital asset, it gets capital gains treatment.

To correctly analyze this circumstance, you must understand that in legal construction, when there seems to be a conflict in language, specific language trumps general language. In other words, section 1221 does not need to spell out all of the ins and outs and exceptions when dealing with foreign currency because section 988 takes care of that.

Section 988 is the more specific language when dealing with foreign currency and is thus controlling on the issue. Besides, there actually are times when "nonfunctional" currency might be considered a capital asset subject to capital gains. You might think of it like this.

Foreign currency is a capital asset under section 1221 except where Section 988 says it is not.

Probably the biggest thing you will read/hear is, "I called the IRS and . . ." Invariably they point to publication 525 p 33 which says that for a personal foreign currency transaction there will be no recognition of the gain if is is less than $200 and recognized as Capital Gains if the gain is more than $200. The problem is that the IRS is tricky and while it certainly seems cut and dried, it is not.

(More on this below.)

MY ANALYSIS OF THE TAXATION ON A DINAR INVESTMENT

Section 988 OR Section 1256?

The Internal Revenue Code (IRC) deals with foreign currency exchange profits and losses under two different Sections; 988 and 1256. The primary section, 988, deals with gains and losses as ordinary income (with one small exception). However, foreign currency investors are often able to opt out of Section 988 and have their investments treated as Capital Gains under Section 1256. Unfortunately, Section 1256 only applies to contracts (i.e. futures contracts and forward contracts) for regularly traded foreign currency. Even if Dinar were a regularly traded currency, I have not seen anyone saying, "I just purchased a spot contract on Dinar this morning. Go RV!!" What I see instead is that people have purchased Dinar either in an account or the physical currency and will hold that currency as long as they want to hold it.

Therefore, even if Dinar were a regularly traded currency (which it is not), Section 1256 still does not apply. Therefore you are stuck under Section 988.

The Confusion of Section 988

Many people have looked at IRS Publication 525, Pg. 33 to justify their assertions that your Dinar RV income should be treated as Capital Gains. It states:

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 capital gain.

This sounds pretty cut and dried. However, you should never underestimate the confusion of the IRS or its code, the IRC. The above quote refers to a "personal . . . transaction." You might be surprised to know that what you have done is not a "personal transaction" under the language of Section 988. IRS Pub. 525 did not anticipated a situation where masses of individuals would be investing in foreign currency with hopes of obscene profits. This language is intended for the traveler who went to New Zealand on "holiday" and when they returned and exchanged back to dollars, they had a little bit of gain or loss. That is not your situation.

Breaking it Down

I figure the best way to make everything clear is to show you the part of Section 988 dealing with "Personal Transactions." and then explain it.

Section 988 (e)

Application to individuals

(1) In general

The preceding provisions of this section shall not apply to any section

988 transaction entered into by an individual which is a personal transaction. [so far it looks pretty good. This means it will not be ordinary income. It will be treated like any other asset and be Capital Gains.]

(2) Exclusion for certain personal transactions

If--

(A ) The preceding provisions of this section shall not apply to any transaction, and

(B ) such transaction is a personal transaction,

no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200. [This means that if the gain is lower than $200 you don't even claim it.

However, if you exceed $200 then you are back to my previous statement.

Still looks pretty good. This is where the information for IRS Pub 525 comes from.

Unfortunately this is where most people stop.]

(3) Personal transactions

For purposes of this subsection, the term "personal transaction" means [finally a definition] any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of--

(A ) section 162 (other than traveling expenses described in subsection (a)(2) thereof), or

(B ) section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes). [and we still don't know what it "shall not include"]

You can see how this can get confusing. To really look at it, we should probably go to Section 162 and Section 212, but I'm going to skip 162 and tell you what 212 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 of income

(2) for the management, conservation, or maintenance or property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

Each Dinar purchase had expenses associated with it such as transaction fees, transportation fees, etc.... That is how the dealers stay in business. Since there WERE expenses related to the purchase of Dinar that "meet the requirements" of Section 212(1) and/or Section 212(2), the income associated with those transactions are specifically EXCLUDED from the definition of "personal transaction" under Section 988.

Section 988 (e) "Application to individuals" - does not apply. Since

(e) basically says that the provisions of Section 988 don't apply and now you can't use (e), you are back in a situation where the provisions of Section 988 DO apply. That means that you have ORDINARY INCOME. It even goes as far as to say that it should be looked at as "interest income."

A WAY OUT

Some people argue that they didn't have any expense associated with an

investment or business transaction. However, there were transaction

fees, transportation fees, etc... that "could" be deducted under

section 212 as investment expenses. Since they "could" be deducted as

investment expenses, this is not a "personal transaction."

The exception to this is if you absolutely had NO expenses associated

with your Dinar that you "could" claim as investment expense. Since

none of us got our Dinar in contemplation of an exotic vacation to the

Iraqi deserts, the only way that happens is if you got it as a gift

(not as an investment). Then you get capital gains treatment. (Be ready

to prove it was a gift if you get audited.)

WHAT THE IRS THINKS OF MY ANALYSIS

To further corroborate my analysis of how the IRS would determine the

tax on these transactions (not what we would like to believe), I sent

my analysis to a friend who is a criminal investigator for the IRS. She

forwarded it to an "International Examiner" who agreed with my

analysis. (Perhaps when I get to my other computer I might post her

email (with name removed) and attach the examples she sent that are

used by the examiners in evaluating section 988. There is an example in

the materials that specifically addresses selling foreign currency for

US $ as a Section 988 Transaction.)

FINAL COMMENTS

As I said before, I am an "Estate Planning" attorney. I am not a tax

attorney. I am tax trained with my undergrad being in accounting,

receiving a certificate in tax from my law school, and working in a

field where I am constantly looking at ways to help people save taxes.

However, I am not above understanding that I can be wrong sometimes. If

any of you have a brilliant tax attorney who has a way out of what I

have just described, I'm sure we would all LOVE to hear about it. Until

then, be safe with the IRS - it is ordinary income under Section 988.

Having said all of that - I don't believe guys like Vernon Jacobs just

spew stuff out without reason. I really would like to understand his

thoughts behind what he said. I'd love to be proved wrong, but until

then. . . . I will practice an abundance of caution and go with what

the International Examiner thought - ordinary income unless received as

a gift.

Best of Blessings,

Mark

SHORTENED DISCLAIMER

Should put a disclaimer here - I am an attorney - you can't use this as

legal advice and we do not have an attorney client relationship (Assume

this goes for anything I ever write unless I am writing it just for you

as my client.)"

[chuckray]

if i went to Dubai and cashed in--would there be record of it here ?

what about Mexico banks like Scotia or HSBC ?

[gypsygirl]

I doubt there would be any reporting of a cash transaction made outside the US but beware if you plan on bringing that cash back in later....every customs and immigration form I've ever filled out upon returning to the US has asked if I'm carrying over $10,000 in currency. I personally would not risk lying about it. If, however, you're talking about setting up a bank account with a non-US bank, cashing your dinar in another country, depositing the funds into that non-US bank and then coming home, I don't see how anyone would ever know. You can honestly fill in the customs and immigrations forms as "no cash over 10k".

[chuckray]

I doubt there would be any reporting of a cash transaction made outside the US but beware if you plan on bringing that cash back in later....every customs and immigration form I've ever filled out upon returning to the US has asked if I'm carrying over $10,000 in currency. I personally would not risk lying about it. If, however, you're talking about setting up a bank account with a non-US bank, cashing your dinar in another country, depositing the funds into that non-US bank and then coming home, I don't see how anyone would ever know. You can honestly fill in the customs and immigrations forms as "no cash over 10k".

was not planning on even coming back--hang out in a tropical place forever--LOL

[LettheRVbegin]

I posted a topic in regards to this and people have replied saying that even when you go to different country to cash in, you'd still leave a paper trail, therefore, it is almost impossible to cash in and get away with it. Maybe if you cash in less than $10,000 at a time you can get away with it. Not sure though... I am still thinking about going to hong kong and cash the dinars at HSBC when it RV's

[the-doctor]

You have explained the tax situation with regards to a non-trade-able currency, but what I can understand,

When the Dinar goes RV, it would then be a trade-able currency as handled on the Forex. Wherewith tax code you used did not cover this as a trade-able currency.

But thanks for the try

[billio0]

Wow! Thanks NCTRIGUY.

This information is what I have been seeking for quite awhile.

I happen to agree fully with Mark's assessment, but until now had come to believe that at RV our profits of a year old or more would be taxed as capital gains. This certainly puts things in better focus for what I need to do post-RV.

Keep up the good work, and thanks again for coming through for us DinarVets.

This ia a prime example of why this site trumps all others, even with the bashers to contend with.

[LettheRVbegin]

I've never been caught bringing in more than 10,000 USD with the customs. (Not that I'm saying I do this every time )I simply tell them that I was out for a business trip and came back. If they ask you questions, make sure you only answer what they asked. Do not get into details and etc.

I saw what SMEE2 had written, and he said that even if you open up an account overseas, that bank will still report how much you have in your account in your country. He had mentioned that swiss bank didn't report, but things are changing now especially when the government wants to be involved in everything that we do.

[NCTRIGUY]

You have explained the tax situation with regards to a non-trade-able currency, but what I can understand,

When the Dinar goes RV, it would then be a trade-able currency as handled on the Forex. Wherewith tax code you used did not cover this as a trade-able currency.

But thanks for the try

Try? I post something that might pertain to everyone that holds this currency and your fist post says "BUT THANKS FOR THE TRY"? You know it is people like you that drive me insane, no value to this board. Been banned one too many times and had to come up with a new name? I MEAN REALLY?

Sorry folks, was just trying to help people with this post. I mean again, REALLY?

[dieselblondie]

Definitely food for thought... But I'm not gonna lie, as much I want to be abreast of tax implications, I'll probably leave all that to my accountant when this thing goes. I'll be too busy sipping sweet tea on a sunny course, perfecting my handicap

[dinardarius]

I'll gift you if you gift me !!!!!!!

It is best to ask a qualified tax person befor the RV if you can afford that.

Edited February 1, 2011 by dinardarius

[Nitrobuzz]

THANKS NCTRIGUY!!!! Very helpful and important information.

Your invited to the RV cash in party, for sure!!!!!!

THANKS NCTRIGUY!!!! Very helpful and important information.

Your invited to the RV cash in party, for sure!!!!!!

Oooops! I have no Idea how that happened!!!

[detroitjazzman]

I doubt there would be any reporting of a cash transaction made outside the US but beware if you plan on bringing that cash back in later....every customs and immigration form I've ever filled out upon returning to the US has asked if I'm carrying over $10,000 in currency. I personally would not risk lying about it. If, however, you're talking about setting up a bank account with a non-US bank, cashing your dinar in another country, depositing the funds into that non-US bank and then coming home, I don't see how anyone would ever know. You can honestly fill in the customs and immigrations forms as "no cash over 10k".

Two guys frrom michigan went to canada to play in the casino's there, and had a huge winning streak. Returned to Michigan and filled out the form as you suggested, and indicated they had no currency over $10,000.00. For whatever reason...they were searched. cash was found....cash was confiscated!!! they eventually had money returned, less the fine imposed for not declaring the cash. Is it worth it? Just like taxes you know you gotta pay, why risk it... just saying

[the-doctor]

Ncitryguy, I am not bashing anyone. Just that his scenario of using the Dinar in a non-trade-able currency does fill the scenario everyone is hoping for. I also could not come to conclusion what the tax rate would be. Sorry, I am a guy where you need to come to the point and justify for position.

How much is the rate in your scenario?

If or when the Dinar RV's, it is expected to be a Trade-able currency, floating on the Forex. Now it is possible that we will all get screwed and a slight of hand that will make all of our notes void.

But let's go for the first scenario. When going through the obscure code of the IRS, either it will be considered a currency investment at a 28% rate or it will be considered as income at at much higher rate - this looks like a harbinger where a tax lawyer may be needed. But if falls in the scenario first stated, we are screwed, Since the Dinar will not be trade-able and be worthless or at it's present price.

But if you read through and view the Dinar as non-trade-able, then it will be worthless or is at it is today.

Just a note: if you compare the oil past reserves of Iraq to Kuwait, then the IQD should be around $4.50, if you take in the potential new reserves of 500 billion barrels, then the IQD should be in the $15 range. But those numbers do not include security or living conditions.

[magicman6685]

If you have been holding your Dinar for more than a year, you will be taxed only 15% as long term investment. That information was told to me by my Tax Attorney. Can someone please concur what I have written? Thanks in advance. GO RV!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[tommyboy]

You guys that are planning to go somplace other than the US or Canada to cash in might want to check out the banking in Belize. They are one of the places in the world where you can hide cash, plus it's an English speaking country. They also have HSBC banks and, from what I understand, you can access everything in your account(s) from North America.

Google it !!

I'm staying here and payin' out the nose but thought I would give others more options.

[the-doctor]

if your Tax guy says 15%, I say go with it. Possession is 9 / 10 of the law. That would put the Dinar in the investment grade - nice. I personally feel that the tax law in this situation is really complicated and I doubt if the IRS even understands. But hopefully we will all know next year.

[tevye02]

Everyone:

Marks handle is execonsult. he is an estate attorney. I dont know him personally but I have read his posts from start to finish. I think he nailed the tax implications of the Dinar. I am also a tax professional and when researching this for a client I too came up with a capital gain scenario. After reading Mark's (execonsult) posts I have changed my opinion.

Please go to the Tax section of the forum and look things over and print what you find interesting. Then share these with your tax advisor. All is not as it seems with this investment and your tax person can only help you when they have ALL of the relevent data. I can assure you that they have not seen anything like this before (none of us has!)

This is not the area to go into detail - just go to the section that is and you will fiind a wealth of information.

Just my 23.4 Dinar

[Richardk]

One word "Belize"

Stay grounded, calm and be happy

Go RV/RI

[On_Reserve]

If you can do it, it may be best to hold your dinar inside of a Roth IRA. After RV, you can then get tax free, penalty free access to this money early (pre age 59.5) as defined by Rule 72t.

TS

I believe in the RV; I don't believe in the cult.

[inwest]

I bank in both Canada and the US. Large deposits made in either country are reported to the tax department in that country who share the information with their counterparts in the other country. Canadians and Americans are taxed on their "world income". Most trading partners of Canada and the US have reciprocal agreements with both Canada and the US to report large deposits made to their banks by foreigners. The only places to be anonymous are the "off shore tax havens."

[Sdr]

I doubt there would be any reporting of a cash transaction made outside the US but beware if you plan on bringing that cash back in later....every customs and immigration form I've ever filled out upon returning to the US has asked if I'm carrying over $10,000 in currency. I personally would not risk lying about it. If, however, you're talking about setting up a bank account with a non-US bank, cashing your dinar in another country, depositing the funds into that non-US bank and then coming home, I don't see how anyone would ever know. You can honestly fill in the customs and immigrations forms as "no cash over 10k".

Missing the point I thnk here.....it's what you are going to end up reporting on your 1040 that is of interest......you can make the profit and keep it anywhere in the world.....and even have the bank debit card to carry aroound to spend all that lovely profit on......Note the word profit here......it's the operative one.

Now would be the time to encourage a 1040 reporting and not a 1120 corporation........in case you ask

I'm also going for the disclaimer of reliance on advice......unless you are my client.....I am a tax profesional. Up to you what you do.....?but think it through and get written advice that you can rely on...and sue on afterwards! Disclaimer repeat ad nauseam.

I bank in both Canada and the US. Large deposits made in either country are reported to the tax department in that country who share the information with their counterparts in the other country. Canadians and Americans are taxed on their "world income". Most trading partners of Canada and the US have reciprocal agreements with both Canada and the US to report large deposits made to their banks by foreigners. The only places to be anonymous are the "off shore tax havens."

Hmmmmmmm....used to say that about Switzerland.....well that's not true any more.......I thunk you will find that the IRS have a finger in more so called tax havens than you would imagine. There has been considerable effort to stop offshore tax evasion.........very successfully.........you will find a large increase in the numb of convictions and the safe harbor concession on offshore banking reporting finished more than a year ago. You are required to report offshore accounts......number location and worth.

Edited February 1, 2011 by Sdr

[Sdr]

was not planning on even coming back--hang out in a tropical place forever--LOL

Sorry, there are minor exceptions to this..but if you are a us citizen, then you will be filing a us tax return.......so be warned ....the IRS just love visits to tropical islands and returning with armfuls of cash and a conviction for tax evasion.

Fun?

[rjboots1]

To the guys talking about being able to "hide" money in Belize, I hate to burst anyone's bubble, but Belize signed a tax treaty with the US several months ago, and they will definitely be communicating with the IRS about money on deposit in Belize......sorry............ How about we all just pay the tax bill and not spend the rest of our lives looking over our shoulders wondering when we're gonna get clobbered.

I for one am paying the tax rate based on regular income and moving on down the road. If I happen to overpay, the IRS will either refund it or steal it. Either way, so be it. It'll be my gift to uncle Sam for providing such an incredible opportunity.

[Sdr]

To the guys talking about being able to "hide" money in Belize, I hate to burst anyone's bubble, but Belize signed a tax treaty with the US several months ago, and they will definitely be communicating with the IRS about money on deposit in Belize......sorry............ How about we all just pay the tax bill and not spend the rest of our lives looking over our shoulders wondering when we're gonna get clobbered.

I for one am paying the tax rate based on regular income and moving on down the road. If I happen to overpay, the IRS will either refund it or steal it. Either way, so be it. It'll be my gift to uncle Sam for providing such an incredible opportunity.

Before you bash for exceptions...beware of any of the treaties....young or old.......Very few of the ones that I have seen will help you.....more reinforce the need for extreme care than relieve a dubious psition.

Renewed discaimer. I am a tax professional. Unless you are addressed specifically as my client you are not in any way a party to an attorney client privilege .....which applies to any post I may have, or will make.

The quote from rjboots1 is as sensible as it gets.......Until the gift word!

Edited February 1, 2011 by Sdr