Foreign Currency Profits Taxed Under Capital Gains

[Star Ship]

The most recent IRS Publication 525 - on page 33 of the document - middle column near the bottom of the page - FOREIGN CURRENCY TRANSACTIONS " If you have a gain (profit) on a personal foreign currency transaction because of changes in the exchange rate.... if the gain is more than $200 it must be reported as Capital Gains."

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

[pokerplayer]

This is true in Canada as well. It's well defined as to what portion is taxable.

pp

[tlammy]

Thank you Star Ship!!!

Can't get any clearer than that.

[usndiver]

The gains for this investment will be treated as ordinary income under Section 988 of the Internal Revenue code. This subject has been covered and discussed several times in the Tax Discussion Forum. ExecConsultant has posted several times on this topic.

Do us all a favor and research the previous posts so that you do not inadvertantly re-post a previously discussed topic.

thanks and good luck.

[AoK]

USNDIVER : that's right! just read that!

[dinarmite]

The gains for this investment will be treated as ordinary income under Section 988 of the Internal Revenue code. This subject has been covered and discussed several times in the Tax Discussion Forum. ExecConsultant has posted several times on this topic.

Do us all a favor and research the previous posts so that you do not inadvertantly re-post a previously discussed topic.

thanks and good luck.

With so many new 15% off the top posts, I think Star Ship was trying to get people to chill..........most don't go back very far to read.

[Crow]

Yeah.....it needs to RV or LOP first!! No sense worrying about this right now, unless you have been in this since the beginning and have millions upon millions of dinner!!!

[Dalite]

Actually, both publications address the currency exchange profit issue.

I would be willing to trust any CPA who will sign on the bottom line and be responsible for any penalties.

Anyone here that wants to submit and opinion and an affidavit of responsibility for said opinion is credible to me..

Don't count on a IRS employee to get it right the first time either.

Be sure to get a employee ID number from each agent on each call to get an answer, and record the results.

When you get to the best 3 out of 5 on either publications, the odds go up that is the way it will be interpreted.

Not meant to dispute or upset either of the players here, but the IRS has a lot of codes that they really don't understand; all designed to trap revenue.

There are often overlapping codes on the same subject, and when a new one is introduced, it is obviously not researched first.

No matter who decides the liabilities in my situation, I will be sure to have a paper trail back to their front door, and a clearly understood agreement of ultimate responsibility.

This isn't horseshoes or hand grenades here.....

[Star Ship]

The gains for this investment will be treated as ordinary income under Section 988 of the Internal Revenue code. This subject has been covered and discussed several times in the Tax Discussion Forum. ExecConsultant has posted several times on this topic.

Do us all a favor and research the previous posts so that you do not inadvertantly re-post a previously discussed topic.

thanks and good luck.

First of all you don't have to be soooo rude when posting your rebuttal to my post - which is in BLACK AND WHITE on the IRS PUB 525 - I talked with the following IRS Agent and I choose to believe the Agent Mr. Kirk ID# 5906613. at IRS OFC 1-800-829-1040 in the Complex Individual Issues Dept. As far as previous posts, in the 15% off the top topic yesterday, I plainly stated that I would once again try to find the IRS PUB. #. It is not a capital offense to repost info - as often - the same old mis-information goes round and round time and time again. So, please don't scold me. I have a right to post what I want when I want, just as you do.

Mr. USNDIVER -= you simply could have stated that you were aware of another PUB that lead you to believe it might be treated as ordinary income. You seem to be really edgy now-a-days. Maybe a Valium would help.

Blessings - Peace!

[usndiver]

I am aware of the other pub, oh what's that? Yes, I did do my own homework by researching previous posts and therefore didn't add another redundant post to the boards. Your quite welcome, don't mention it.

[Star Ship]

I am aware of the other pub, oh what's that? Yes, I did do my own homework by researching previous posts and therefore didn't add another redundant post to the boards. Your quite welcome, don't mention it.

Thank you for sharing that with me.

[popper4]

I am aware of the other pub, oh what's that? Yes, I did do my own homework by researching previous posts and therefore didn't add another redundant post to the boards. Your quite welcome, don't mention it.

So what if it gets re-posted. I'm sure not everybody reads this forum everyday and there's new people coming on all the time. If I've already read something, I just move on. No big deal.

[Upgradable]

Chill folks. Posting links to the old threads would be the most effective way to avoid the confrontation that happened here.

Usndiver, I totally get your frustration when topics recur with new members. I have it regularly moderating the VIP and OSI forums. However, I liken it to a child asking how to spell a certain word, and the adult says "look it up in the dictionary!" The child responds by saying "I would, if I knew how to spell it!"

It's difficult to know that topics have been discussed before when you are new. Let's help "raise them up."

[usndiver]

Got ya Upgradable. I'll play nicer and make sure you get two umbrella drinks from me in B!!

[ExecConsult]

First of all you don't have to be soooo rude when posting your rebuttal to my post - which is in BLACK AND WHITE on the IRS PUB 525 - I talked with the following IRS Agent and I choose to believe the Agent Mr. Kirk ID# 5906613. at IRS OFC 1-800-829-1040 in the Complex Individual Issues Dept. As far as previous posts, in the 15% off the top topic yesterday, I plainly stated that I would once again try to find the IRS PUB. #. It is not a capital offense to repost info - as often - the same old mis-information goes round and round time and time again. So, please don't scold me. I have a right to post what I want when I want, just as you do.

Blessings - Peace!

I thought that I had already replied to this message but I can't find it. If it comes up as a double post I apologize.

Hi, This is Mark. A lot of you who follow the tax forums know me. For those of you who don't, I'm an estate planning attorney and I have put a lot of time into the tax issues relating to dinar. This "Call to the IRS" was discussed over and over a while back. I did a post some time back on this issue. I want to be sure people have the best information I can provide in their decision making processes. I hope that no one feels I am bashing them. I am just going to spell things out and give people the best information I can.

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

[firemans35]

So what if it gets re-posted. I'm sure not everybody reads this forum everyday and there's new people coming on all the time. If I've already read something, I just move on. No big deal.

Exactly! And I'm not going to search through a gazillion pages of old posts either.

[Choppermike]

I am aware of the other pub, oh what's that? Yes, I did do my own homework by researching previous posts and therefore didn't add another redundant post to the boards. Your quite welcome, don't mention it.

Dude, take a chill pill. Why do you even care what others think or interpret. It affects you in no way, shape or form. Geez. BTW - My tax accountant and attorney both claim that it will be Capital Gains.

[ExecConsult]

In reference to my post above, I found my notes on the call I made.

"I spoke with the Mr. Colbert ID# 1000220899. He was aware of section 988 controlling the issue. However, he informed me that none of the people from customer care (including Mr. Kirk ID# 5906613) has been trained on section 988. None of them are qualified to answer questions about gains from foreign currency exchange rates."

Best of Blessings,

Mark