Dinar Investing Does Not Trigger IRS Personal-Use Rules

[krome2ez]

Investing|9/21/2011 @ 12:35PM |4,388 views

Iraqi Dinar Investing Does Not Trigger IRS Personal-Use Rules

Robert A. Green, CPA,

Iraqi dinar

My recent blog, “Is The Iraqi Dinar Worthless Paper Or Maker Of Millionaires?” generated a firestorm of comments and opposing views. Here are some additional tax answers to questions and comments made.

Various IRS publications discuss tax rules for physically-held currency held for personal-use, mentioning capital gains treatment on gains, and no tax-deductible loss (capital or otherwise) on personal-use losses. These are standard tax rules for personal-use property. Taxpayers may only deduct capital losses on investment (Section 212) or trade or business (section 162) property.

Taxpayers who purchase Iraqi dinars generally are buying dinars for investment purposes, not personal-use. An example of personal use would be buying euros to use while traveling in Europe for personal reasons.

When it comes to physically-held currency and forex transactions (spot and forward) held for investment or business use, Section 988 (foreign currency transaction) tax rules apply. Section 988 is ordinary gain or loss tax treatment. Good news, the capital loss limitation of $3,000 per year does not apply to Section 988 ordinary losses.

An investor holding forex as a capital asset may file a contemporaneous election to opt-out of Section 988 into capital gains and loss rules, otherwise known as the capital gains election. But if you invest in physically-held currency, Section 988 does not permit you to opt-out of Section 988.

Special Offer: Some of Richard Lehmann’s recommended bonds, MLPs, preferreds and Canadian energy companies are providing yields up to 10%. Click here to begin profiting with Forbes/Lehmann Income Securities Investor.

In summary, if you heard from an accountant, the IRS or a friend that capital gains apply by default to physically-held currency, that answer is only correct for personal-use sales of physically-held currency. It’s incorrect for the sale of physically-held currency or forex held for investment or business purposes. And don’t forget, you can’t take a tax loss of any kind (capital or ordinary) on the sale of personal-use physically-held currency either.

http://www.forbes.com/sites/greatspeculations/2011/09/21/iraqi-dinar-investing-does-not-trigger-irs-personal-use-rules/

[gatoraces]

3rd time's a charm

[tyron]

3rd time's a charm

If I was an American I could re-read this again and again and again and...

[ExecConsult]

If I was an American I could re-read this again and again and again and...

Why - There was nothing fun or earth shattering about it that I saw. Did I miss something?

[Markinsa]

Why - There was nothing fun or earth shattering about it that I saw. Did I miss something?

The Sarcasm...

-

[ExecConsult]

The Sarcasm...

-

OOOOOhhhhhh - I see -- my speakers could not pick up the sarcastic tone in tyron's typing. (Personal note - need to work on that).

LOL

Blessings,

Mark

[Darin]

Why - There was nothing fun or earth shattering about it that I saw. Did I miss something?

The way I read it, unless I read it entirely wrong....

Was, the way the majority of us hold IQD - we would have to take into account capital gains... Because we're holding the physical currency as an investment.

However, if the currency were to lose value, we are not allowed to claim "losses." This goes for whether we hold it for personal use or investment use.

So, either way the value goes, nothing is in our favor tax wise.

[ExecConsult]

The way I read it, unless I read it entirely wrong....

Was, the way the majority of us hold IQD - we would have to take into account capital gains... Because we're holding the physical currency as an investment.

However, if the currency were to lose value, we are not allowed to claim "losses." This goes for whether we hold it for personal use or investment use.

So, either way the value goes, nothing is in our favor tax wise.

Sorry to tell you this Darin, but it is worse than that. What Robert Green says is that you will NOT be allowed to claim capital gains under the personal-use exception in Section 988. Let me explain.

Section 988 is the law that controls the taxation for foreign currency exchanges. Even people who trade forex under Section 1256 are allowed to do so only because Section 988 says they can.

Generally anyone who has gains or losses under section 988 is required to report them as ordinary gains or ordinary losses. Ordinary Gains get the highest tax brackets (35% maximum). There is one exception to the rule for people who end up under Section 988 due to "Personal Transactions" (this is the "Personal-use" rule Robert Green talks about). This would primarily be people who do exchanges to travel. (i.e. Exchanging for Francs to go see the Eiffel tower)

What Mr. Green says in his Forbes contribution is that the Personal-use rule is NOT triggered. We do not get the exception. We can not claim capital gains. Why is that bad? Capital Gains Maximum tax rate is 15%. Most of us would much rather have 15% than 35%.

The good news (kind of a consolation prize) is that if we see huge losses instead of enormous gains, we actually CAN take the losses whereas if we were under the "Personal Transaction"/"Personal-use" exception we could not.

Following, I'll post the comment that I put on Forbes a day or two after Mr. Green's posting.

Best of Blessings,

Mark

____________________________________________________________________________________________________________________________________________

(Following I will post the comment I left on the Forbes website in response to Mr. Robert Green's posting. I posted my comment on the 23RD of September 2011: To read it on the website, simply go to the bottom of the Forbes website page and "expand all comments.") The comment follows:

____________________________________________________________________________________________________________________________________________

There is one argument to the contrary which I see repeated over and over again on dinar investment forums. Since a Dinar investor made me aware of your post this morning, I am sure the argument is sure to follow. Therefore, I thought I might take the wind out of their sails and deal with the argument preemptively.

Dinar investors make frequent reference to Publication 525 Pg. 33 which quotes the personal-use rule found in Section 988. People have the tendency to say, “I don’t know what you are talking about, but it tells me capital gains right there in black and white and that is good enough for me.” To make matters even worse people mistakenly rely upon calls to the Customer Care Department of the IRS. Too often, the call center employee will do a search, come up with Publication 525 Pg. 33 and, with apparent authority, tell the caller that for a “Personal Transaction” the gains are to be treated as capital gains.

SO WHY IS THIS WRONG?

The most popularly repeated tale of how a person found out for sure that taxes would be capital gains has to do with a call made to the IRS on 03-14-2011. The caller was transferred to the “Complex Individual Issues” department. (This sounds important but it is still part of Customer Care.) The caller spoke with a “Mr. Kirk ID# 5906613 who informed the caller that this would be taxed as capital gains. I have typed till I was blue in the fingers trying to tell people otherwise but to no avail, so I thought I’d try speaking their language. I CALLED THE IRS TOO!!

I requested to be transferred to the “Complex Individual Issues” section of Customer Care. I spoke with Mr. Colbert ID# 1000220899. 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. They have a list of things they are not supposed to give answers about and the topic of foreign currency transactions is on the list. He suggested that I talk to a certified public accountant about it. (You mean like Mr. Robert Green?)

The next argument I sometimes get is that even if Mr. Kirk was not “officially” qualified to counsel people on Section 988 and currency exchange gains, he still knows what he is talking about and has the documentation to back it up. “It is right there in black and white in IRS Publication 525 Pg. 33. The IRS says it is supposed to be Capital Gains.”

Often readers do not understand that you can not rely upon IRS publications. Sounds silly right? “They IRS said it. Whad’da ya mean I can’t rely on it?” Unfortunately, that is the case. Look at the following quote from the case Caterpillar Tractor Co. v. United States:

“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 OWN PERIL.” [emphasis added] (589 F.2d 1040, 1043, 218 Ct. Cl. 517 (1978)) However, in our case this still does not completely answer the argument because the law says the same thing as the publication.

The language in Pub. 525 is almost a direct quote from Section 988 (e )(2 )(A ) & (B ). Here is the real answer to the argument. The publication does not go on to quote the very next lines of 988 (subsection 988 (e )(3 )) which indicates (as Mr. Robert Green points out in his post) that a transaction of a business or investment nature is NOT qualified as a “Personal Transaction.” Who knew the IRS was so sneaky?

Well, it may not be sneakiness that is the problem here, but one lesson to learn from this situation is that whenever something the IRS says looks cut and dried, look deeper and (as Mr. Colbert of Complex Individual Issues at the IRS said) seek the counsel of a professional.

____________________________________________________________________________________________________________________________________________

Best of Blessings,

Mark A. Galloway, Esq.

Edited September 27, 2011 by ExecConsult

[Darin]

That's sort of backwards than from how I perceived it.

Appears that we can "claim" losses... Which IMO is great news to a degree upon a R/D (in terms of a LOP)

Huge gains, I am sure most of us won't really care too much as we should know taxes have to be paid somewhere. We're all just likely to look to pay the least amount as possible.

[estewart]

Mark, awesome post.

I was hoping to something approaching that when I asked you to comment of the FORBES article. Very happy with how that turned out.