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Am I taxed on capital gains if I exchange 1 foreign currency that has increased in value into another foreign currency?

Saint Petersburg, FL |
Filed under: Tax law

I heard that I only need to pay capital gains taxes if I exchange the foreign currency in to USD or Gold. Is this true? I would like to keep my foreign currencies and I do not want to exchange them into dollars. Do I need to report this to the IRS when dealing with International Currency Exchanges? Can you please refer to any tax law that talks about this so I know what I will be taxed.

Attorney Answers 2

Posted

What you are referring to is a type of financial arbitrage, which is taxed like ordinary income if the asset is held for a year or less, or capital gains if held for a year or more. Financial arbitrage is taking advantage of two different market prices with no risk in the trade. The Internal Revenue Code has written some about the taxation of arbitrage in Mergers and Acquisitions, but not in the foreign currency exchange context. For more info, see this wikipedia entry here:

http://en.wikipedia.org/wiki/Arbitrage

and look at the first example -- this is your example.

You are taxed on the difference in price even though you are trading in foreign currencies because 1) U.S. Citizens are taxed on their worldwide income and 2) You made a profit, by trading one piece of property for another. This is a type of bartering, and bartering income is specifically included in income because the IRS requires that the bartering individual file a 1099-B with the IRS as an informational return. See more info here:

http://www.irs.gov/instructions/i1099b/ar02.html

Legal disclaimer: The above information is not legal advice and should not be relied upon as legal advice. No representations are made in the above communication nor may any information contained herein be used in a court of law as a representation upon which you may rely.

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Posted

There is no provision in the tax code for the exchange of one currency into another. If you make the exchange it is a taxable event. It is as if you sold one currency, received dollars and then bought another currency.

Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

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