Recently, Medic asked me to review some of the articles about the federal income taxation of our investment, as well as whatever else that I could find on it.
First of all, this posting is only for investments in the United States. I have no idea what investors in other countries are doing, nor if it’s as confusing as ours seems to be.
I have reviewed recently written articles from several Certified Public Accountants and Tax Attorneys and have found various opinions on how we are to treat the gains and losses on our foreign currency transactions (i.e. cashing in our Iraqi Dinar).
There seems to be differences of opinions as to if these gains will be ordinary income or treated as capital gains. Yet one constant of all of the opinions that I have read is that the answers are based upon the Internal Revenue Code Sections 988 and/or 1256, or IRS Publication 525. My review of these rules and regulations are as follows;
First, IRC Section 1256 discusses option contracts, hedges and investments made through brokers and/or FOREX. These rules will not apply to our initial investment, but only to those who later decide to invest in the foreign currency market later after the dinar is a recognized and tradable currency.
Second, IRS Publication 525 has to do with “personal transactions” and foreign currency. A brief summary of these rules are typically vacationers who return home with currency that has changed in value since its purchase. Any gains of $200 or less are ignored for taxation purposes. Gains in excess of $200 are treated as capital gains. These rules also do not apply to our investment as I do not believe we qualify under the “personal transactions” definition which is a rather lengthy definition described under IRC Section 988. All are welcome to look this definition up for themselves on the IRS website, http://www.irs.gov/, as I am not going to take up space here for it. Instead of "personal transactions", I believe we qualify as investors, which is not included in the definition under these rules.
That leaves IRC Section 988 as our reference on how our investments will be taxed. IRC Section 988(a)(1)(A) begins with:
§ 988. Treatment of certain foreign currency transactions
(a) General rule
Notwithstanding any other provision of this chapter—
(1) Treatment as ordinary income or loss
(A) In general
Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be).
The key words of this code section are, “Except as otherwise provided in this section”, Upon review of the rest of Code Section 988, no where does it say that foreign currency purchased for investment purposes will be treated as capital gains. Therefore, I do not know what these other professionals are basing their capital gain positions upon.
After reviewing all of the above, I believe, that as the rules and regulations stand now, our investment will be treated as ordinary income.
A key point here is as “things stand right now…” When these rules, regulations and publications were written, Congress, nor the Internal Revenue Service were anticipating a situation where masses of citizens, as well as themselves, would be investing in a foreign currency with the hopes of potentially massive profits. I very well expect that after the RV, this issue will be reviewed and addressed with definitive answers coming from the Internal Revenue Service, with possible input by Congress.
As for me personally, I am going to plan on paying ordinary tax rates and put that money aside. And if there is no definitive answer published regarding the tax treatment, I will hire a Tax Attorney to help review my situation for any changes. Because if the attorney decides that they have a basis where the RV qualifies for capital gain treatment, it will be them defending me in tax court if the IRS disagrees.
I thank you for your time and all comments, agreements and disagreements are welcome.