Dinar Forex Investment: Taxed as Futures or Cash?

[gridkeeper]

I've divided this into two parts, the theory and the question. I have done this in response to the many comments about Dinar investing falling under section 988 rules for filing.

THE THEORY

Currency traders involved in the forex spot (cash) market can choose to be taxed under the same tax rules as regular commodities [iRC (Internal Revenue Code) Section 1256 contracts] or under the special rules of IRC Section 988 (Treatment of Certain Foreign Currency Transactions). IRC 988 applies to cash forex unless the trader elects to opt out.

The Advantage of Section 1256 for Currency Traders

Under Section 1256, forex traders can have a significant advantage over stock traders. By reporting capital gains on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles), forex traders are allowed to split their capital gains on Schedule D using a 60% / 40% split. This means that 60% of the capital gains are taxed at the lower, long-term capital gains rate (currently 15%) and the remaining 40% at the ordinary or short-term capital gains rate, which depends on the tax bracket the trader falls under (as high as 35%). This results in an average rate of 23%, which is 12% less than the regular (short-term) rate.

To Opt Out or Not to Opt Out of Section 988

Companies who profit from the fluctuation in foreign exchange rates as part of their normal course of business, fall under Section 988. This means their gains and losses from foreign exchange (such as buying and selling of foreign goods) are treated as interest income or expense and get taxed accordingly. Consequently, they do not receive the beneficial 60/40 split. So if cash forex is subject to the Section 988 rules, how can a trader elect the more beneficial Section 1256 split?

Forex traders are also exposed to daily exchange rate fluctuations, and their trading activity falls under the provisions of Section 988, because they are not cashing in excess currency from a trip abroad, and are trading the currency as an investment. The Dinar investor is doing the same as any Forex currency trader. They purchase, and have the opportunity for loss or gain depending when they sell within the daily fluctuations. Therefore the daily fluctuations can be considered part of a Dinar trader's assets in the normal course of their business, and since the IRS gives the the currency trader (thats you) the option of rejecting (opting out) of Section 988, the Dinar trader can elect that the gains be taxed under the favorable 60/40 split of Section 1256.

What do you have to do to opt out of Section 988? Even though you don't have to file anything with the IRS to opt out, you are required to do so "internally"; i.e., you must keep records in your own books about the fact that you are opting out of Section 988.

What would a Dinar trader do When Tax Time Comes?

Forex traders in the United States who trade with US-based NFA-member FCM's or RFED's receive 1099 forms from their broker at the end of the year like stock and futures traders do. They normally pull up reports online from their accounts and seek the help of a tax professional. In the case of those who have bought Dinar from 3rd parties and will be redeeming them directly, their purchase receipts combined with the FinCEN form they will be required to fill out to redeem their Dinar, and their bank statements of deposit, will act as their books and reports. It might be even behoove one to create an affidavit with three witnesses, stating their intent to opt out of 988 and claim the 1256 option. In any event, like forex traders, they should still seek the help of a tax professional.

THE QUESTION

Why would this NOT be an appropriate position to stand upon?

[ExecConsult]

The reason is actually fairly simple. You are allowed to opt out of section 988 treatment for section 1256 on forex contracts. This only applies to contracts. Instead of holding a forex contract, each of us holds physical currency. If you trade in dinar spot or futures contracts later on it would apply. However, it does not apply to holding the physical currency.

Best of Blessings,

Mark

I go into a little more involved explanation of this in the following linked post.