IRS rules on currency trading

[robear]

Information on IRS currency exchange rules I received from financial adviser.

"Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain."

[4aprofit]

Is it still the same...short-term holdings....under 1 year...35%......long-term...over a year...15%..???

We've heard so many arguments and theories, not to mention some of the new stuff we've heard of...like any windfall or income over 1 million would be 49%...then, I've herad of a 60/40 currency tax rule/law that applies to Currency Taxation, an AMT Tax, we already know we have our state taxes to add to all of it.....but not sure of what all else...as I've heard of other taxes as well....

Is'nt it strange that you could call 10 IRS Employess, 10 CPA's, 10 Tax Attorney's, 10 Wealth Management Specialists, Etc...and they would all probably give different answers...

Someone mentioned a while back that it might be good/adviseable, to get a tax attorney to give them a pre-determined tax ruling from the IRS before cashing in, so as to avoid a come-back later, even years later, saying you did or did'nt pay all of your taxes, as we all know what penalties and interest can be, and most figure with this type of windfall, that they don't want to take any chances...

[rick25sandi]

I spoke with a tax attorney who told me that if your adjusted income is under $69,000 there is 0 capitol gain taxes

[sheepdog]

I've read several posts by tax attorneys and CPA's here on DV that any gain would be taxed as ordinary income, at least temporarily. My understanding is: No gain for the 1st year. The following taxable year, there would be taxes due on the cashed in amount added to your ordinary income. Is that correct? Also no state taxes due if your state does not have a state income tax. So many different rules may or may not apply because the law is ambiguous in this case. I'm not clear about the $200 withdrawal rule. Some say if you withdraw just $200. per withdrawal, there is no tax due. Is the tax paid at the time of cash-in? Say you cashed in/exchanged 1 mil dinar at a bank into an account and paid all your upfront(cash-in) fees at that time. Would the tax be assessed on that cashed-in amount at that time? Or can you deposit the cashed-in amount into some other bank account and then withdraw just $200 at a time and not pay taxes? That doesn't sound right to me. Somewhere along the process, the gov will get their fair share of the gain. Any answers to clarify the rules would be appreciated. Thanks

[ExecConsult]

Allow me to introduce myself. My name is Mark Galloway. I am an estate planning attorney. See my profile for an abbreviated professional disclaimer.

Here is a link on how the taxes break down -

I wrote the above information - I'll summarize it here:

Section 988 of the Internal Revenue code is what controls the taxes on this issue. It is clear to me from study of the code, the underlying regulations (and more recently the legislative history) that the IRS' view on this currently is that if you exhibit business or investment intent, any gains are to be taxed as ordinary income. In fact, Section 988 says we are to report it as "interest income."

I've read several posts by tax attorneys and CPA's here on DV that any gain would be taxed as ordinary income, at least temporarily. My understanding is: No gain for the 1st year. The following taxable year, there would be taxes due on the cashed in amount added to your ordinary income. Is that correct? Also no state taxes due if your state does not have a state income tax. So many different rules may or may not apply because the law is ambiguous in this case. I'm not clear about the $200 withdrawal rule. Some say if you withdraw just $200. per withdrawal, there is no tax due. Is the tax paid at the time of cash-in? Say you cashed in/exchanged 1 mil dinar at a bank into an account and paid all your upfront(cash-in) fees at that time. Would the tax be assessed on that cashed-in amount at that time? Or can you deposit the cashed-in amount into some other bank account and then withdraw just $200 at a time and not pay taxes? That doesn't sound right to me. Somewhere along the process, the gov will get their fair share of the gain. Any answers to clarify the rules would be appreciated. Thanks

The tax is due in the year it is realized. So if you exchange in 2011 and have gains, when you file your 2011 taxes on April 15 of 2012, the taxes will include the exchange gains from the dinar just as it would include any income from your job or interest income from a bank account. (I'll mention the thing about $200 below.)

I spoke with a tax attorney who told me that if your adjusted income is under $69,000 there is 0 capitol gain taxes

This is true, but if you exchange dinar for USD, I'm betting your income will be above $69,000. Also, as I have mentioned above, the IRS does not currently view this as capital gains in most of our circumstances because we got the dinar as an investment. You should expect to be paying about 35% on all earnings.

Is'nt it strange that you could call 10 IRS Employess, 10 CPA's, 10 Tax Attorney's, 10 Wealth Management Specialists, Etc...and they would all probably give different answers...

I have seen attorneys and CPAs differ on this, but there are only 2 basic answers: Ordinary Income OR Capital Gains. Typically, the attorneys/CPAs saying capital gains have not dug into the matter. We are trained that appreciated assets are capital gains. However, most of us are not trained that currency exchanges can have their own special rules. I started researching because I was trying to show a friend that their banker's attorney was wrong - I had to eat humble pie. The attorneys/CPAs I have read of who claim to have researched this (with the exception of one) say it is taxed as ordinary income.

The ambiguity (and thus the argument) comes from one tiny line in Section 988 that is not defined clearly enough. So, am I saying there is room for argument? Yes.

I actually did another post which argues against what I feel the current IRS position is. Each year the IRS invites the public to make recommendations for things the IRS should give more guidance on. They call it the "Guidance Priority List." I made a submission to the IRS requesting guidance on this very issue. However, in my submission I argue that a capital gains standard should be used. The entire piece can be found here:

Information on IRS currency exchange rules I received from financial adviser.

"Foreign currency transactions. If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain."

So where does this $200 and capital gains come from? If it's not the answer why does it keep cropping up?

The IRS publication 525 on page 33 paraphrases a tiny piece from section 988. It says that for a "personal foreign currency transaction" any gains are to be reported as capital gains if they exceed $200 and any losses are not able to be reported. The problem that most people don't realize is that the language "personal transaction" is very limited and very narrowly defined. This is an EXCEPTION to the rule that was carved out for people who are doing currency exchanges for personal reasons like traveling. Again, this is the exception - the rule is to tax currency exchange gains as ordinary income.

Someone mentioned a while back that it might be good/adviseable, to get a tax attorney to give them a pre-determined tax ruling from the IRS before cashing in, so as to avoid a come-back later, even years later, saying you did or did'nt pay all of your taxes, as we all know what penalties and interest can be, and most figure with this type of windfall, that they don't want to take any chances...

What you mention here is called a "Private Letter Ruling." I am sure that if the IRS does not issue further guidance subsequent to any revaluation, there will be a lot of people seeking a PLR. You can either go that rout or you have two other choices, claim capital gains and put money away in case the IRS disagrees with you. You can then use that money to either fight them in tax court or to just pay the additional taxes assessed. If you make it for three years without a disagreement you should be fine to use the money you set back. The only way they open up records more than three years back is if they can show fraud (make sure you don't commit fraud). Your other option is to simply pay the ordinary income amount. Then if there is sufficient guidance later showing there should have been capital gains treatment, you can file an amended return requesting a refund. While this may not be appealing for purposes of the difficulty in getting money back from the IRS, the appeal that it does have is that you never have to look over your shoulder - EVER.

I hope this is helpful.

Best of Blessings,

Mark

[grand pubah]

+1 Mark, thanks for the thorough post!

GP

[Nadita]

Mark,

Thanks for the post and your answer in plain English that I can understand

I like your idea of paying the state tax in advance because it's tax deductible for the federal taxes and also I like the idea of paying capital gain of 15% and then escrowing the remaining balance of 20% in the interest bearing account or mutual funds to earn interest "just in case" IRS requests more payment. You mentioned about after 3 years, IRS can't go after you for the rest of capital gain taxes.. ? can you please explain this further.

Thanks and God bless you

[tankdude]

Exec - thanks for the info. This ties in with a number of things I've read and planned on your last scenario you suggested.

Pay it as regular income, and hope sometime in the future I can file a 1040X for amended return *lol*. I also plan on paying my estimated state taxes before I file my fed return, so I can deduct that tax payment on the fed side.

I've only had my own business for a few years, but courtesy of a pretty sharp CPA friend I have learned a few things. I have to admit - I think everyone should have a home based business just for the write - offs!

[ExecConsult]

Mark,

Thanks for the post and your answer in plain English that I can understand

I like your idea of paying the state tax in advance because it's tax deductible for the federal taxes and also I like the idea of paying capital gain of 15% and then escrowing the remaining balance of 20% in the interest bearing account or mutual funds to earn interest "just in case" IRS requests more payment. You mentioned about after 3 years, IRS can't go after you for the rest of capital gain taxes.. ? can you please explain this further.

Thanks and God bless you

Just like in criminal cases, in IRS cases there is something referred to as a "statute of limitations." This means that a person typically does not have to worry about the IRS being able to come after them for anything more than three years old unless you have defrauded the IRS. After three years they can not audit you, assess a tax, or start a court proceeding.

Here is a fairly concise list of IRS statute of limitations for assessing a tax for past years:

Statute of Limitations for IRS Assessments

General Rule - The IRS is required to assess tax within 3 (three) years after the return was filed. See section 6501(a ) of the Code and section 301.6501(a )-1(a ) of the regulations. Similarly, no proceeding in court without assessment for the collection of any tax can begin after the expiration of 3 years. See section 301.6501(a)-1(B ) of the regulations.

The statute of limitations is 6 (six) years if the taxpayer omits additional gross income in excess of 25% of the amount of gross income stated in the tax return. See section 6501(e) of the Code and section 301.6501(e)-1 of the regulations.

The statue of limitations does not apply to tax returns prepared by the IRS under the authority of section 6020(B ) of the Code. See section 6501(B )(3) of the Code and section 301.6501(B )-1(c ) of the regulations.

The statute of limitations does not apply in the case of a false or fraudulent return with intent to evade any tax. See section 6501(c )(1) of the Code and section 301.6501(c )-1 of the regulations.

The above list was prepared by a different attorney. It can be found here:

http://www.irstaxattorney.com/statute.html

Hope that helps.

Best of Blessings,

Mark

Edited September 2, 2011 by ExecConsult

[Nadita]

Mark,

Thanks for the reply. In fact I also write in your profile . I doubled up. Your answer here is sufficient. Thanks n csn I contact you if I have mire questions. I have estate attorney but since you are investing in dinar. I might gave questions for you

Until then, thanks a lot and have s blessed and blasted week by GID. He loves you with everlasting live and his grace will always cover you and your family.

[JimH]

I can tell you from personal experience, DON'T jack with the IRS. I fought with them for 10 years and they almost ruined me for life. They will lie, withhold information, double team you and screw you any way they can. After 20 years, I still have IRS leans on my credit report and cannot get anyone to take them off, even though they have been paid off for about 20 years. We are going to make enough money on this deal to make our lives very, very comfortable. Pay the higher amount of ordinary income, don't hold back anything and be done with it. That way they don't have anything to hold you hostage with. It's really sickening to wake up one morning and find out that you have zero in your bank accounts and your paycheck has been confiscated. Yes, they will do it, they have done it to me and they will have absolutely no remorse, nor will they hesitate to do it to you, even if you are right. You might eventually win your case, but in the mean time, you will be living from day to day trying to house and feed your family the best way you can . You are dealing with the "B" team here and they are pissed because they did not have what it takes to succeed outside of the government.

[sheepdog]

Mark, thank you for your time answering all these questions. I heard there is a form we will sign to do the exchange at the banks. That signed form goes back to the IRS with all your info on it reporting your windfall gain. Is that true?

[ExecConsult]

I am not aware of any form that will go to the IRS. However, there still could be one that is planned. I guess the real question is, "What impact would it have on us if there were such a form?" The impact would be that you don't have to wonder if there will be an audit of your return. It is intersting to note that this year was the first year that the adoption credit has been a refundable credit. What did the IRS do? They audited every single return claiming an adoption credit. I'm betting next year they may set a criteria to audit every return that has over X amount of capital gains or interest income. We all get audited anyway.

Best of Blessings,

Mark

[Francie26]

I can tell you from personal experience, DON'T jack with the IRS. I fought with them for 10 years and they almost ruined me for life. They will lie, withhold information, double team you and screw you any way they can. After 20 years, I still have IRS leans on my credit report and cannot get anyone to take them off, even though they have been paid off for about 20 years. We are going to make enough money on this deal to make our lives very, very comfortable. Pay the higher amount of ordinary income, don't hold back anything and be done with it. That way they don't have anything to hold you hostage with. It's really sickening to wake up one morning and find out that you have zero in your bank accounts and your paycheck has been confiscated. Yes, they will do it, they have done it to me and they will have absolutely no remorse, nor will they hesitate to do it to you, even if you are right. You might eventually win your case, but in the mean time, you will be living from day to day trying to house and feed your family the best way you can . You are dealing with the "B" team here and they are pissed because they did not have what it takes to succeed outside of the government.

This makes me sick. And to think this can be done to good people by what is essentially an illegal organization.

[Francie26]

Mark, thank you for your time answering all these questions. I heard there is a form we will sign to do the exchange at the banks. That signed form goes back to the IRS with all your info on it reporting your windfall gain. Is that true?

There is a form required at the time you cash in. It's called Fincen 104, Currency Transaction Report. It also says it was formerly called Form 4789, (Eff. December, 2003) It isn't IRS, however. It is a Department of the Treasury report. Perhaps this is the form you heard about. I'm sure that people who are in the currency trading business know about this form, but when I cash in, it will be the first time I've ever done anything like this, and i kept getting the IRS and the UST mixed up there for a while.

[Redwizard]

I can tell you from personal experience, DON'T jack with the IRS. I fought with them for 10 years and they almost ruined me for life. They will lie, withhold information, double team you and screw you any way they can. After 20 years, I still have IRS leans on my credit report and cannot get anyone to take them off, even though they have been paid off for about 20 years. We are going to make enough money on this deal to make our lives very, very comfortable. Pay the higher amount of ordinary income, don't hold back anything and be done with it. That way they don't have anything to hold you hostage with. It's really sickening to wake up one morning and find out that you have zero in your bank accounts and your paycheck has been confiscated. Yes, they will do it, they have done it to me and they will have absolutely no remorse, nor will they hesitate to do it to you, even if you are right. You might eventually win your case, but in the mean time, you will be living from day to day trying to house and feed your family the best way you can . You are dealing with the "B" team here and they are pissed because they did not have what it takes to succeed outside of the government.

Your 100% correct. And they change IRS auditors every year, so you start over every year. One will make a deal with you and will leave before they finish the paper work. The IRS will gut you like a fish! Last year the gov hired 97,000 more auditors, an auditor told me this and also told me they have orders to get every dime they can get, that the gov is broke. Straight from the auditors mouth!