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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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Is there tax on currency exchange?

Resolved Question:

If I bought a foreign currency at a low rate then exchanged it later at a better exchange rate, do I have to report the difference on my tax return? If so, what sort of tax would be due?

Submitted: 7 years ago.
Category: Tax
Expert:  Lev replied 7 years ago.

Yes - the income from currency exchange is your taxable income and is reported as capital gain - long or short term depending how long you held the foreign currency - more or less than a year.

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.

The purchase of the foreign currency is not taxable transaction.

The sale transaction is reported on the schedule D -

If you held the foreign currency more than a year - the gain will be taxed at reduced rate - not more than 15%.

If you held the currency less than a year - the gain will be taxed at your regular tax rate.

State taxes are extra.

Let me know if you need any help.

Customer: replied 7 years ago.

Thanks for your answer. My situation involves my LLC. Does that change anything? So then if I decide to travel and buy foreign currency for my trip. Upon returning cash in any remaining foreign currency for dollars, do I have to report and gain/loss since the purchase? If so, it would seem that I should be able to get credit for the weakening dollar and be able to report that loss in value, Right?

Expert:  Lev replied 7 years ago.

Generally, single member LLC is disregarded entity - means - all income and expenses are reported on the owner's individual tax return - schedule C - so there should not be any difference if you have LLC or you are a solo proprietorship.

All transactions are booked in US dollars - and if you have any gain/loss on foreign currency transactions are calculated in US dollars and only if the foreign currency converted back into US dollars.

There is no gain/loss recognized if you keep funds in a foreign currency without converting back into US dollars or into a different currency.

If the gain for the tax year is less than $200 - you do not need to report it as your income.

However - if the gain is more than $200, - it should be reported it as a capital gain.

Let me know if you need any help with reporting.

Customer: replied 7 years ago.

So if I cash it into another foreign currency that is close to the dollar and then from that currency into dollars (representing little or no gain form the second currency to the dollar) is there a tax issue still lingering for the first trade?

To be more exact:

I purchased a large amount of Iraqi dinar valued at the time of purchase at .000855 to the dollar. I am expecting it to revalue soon to over a dollar per dinar. So should i at that point exchange it into another currency and then into dollars? I promise this is my last point i need addressed. You have been very helpful and I plan on accepting your answer.

Expert:  Lev replied 7 years ago.

If you purchased Iraqi dinars for - let say $10,000 - that should be treated the similar way as you purchase shares or any other property.

There is no any capital gain as long as you hold Iraqi dinars.

If you sell them - that is a sale and there might be capital gain/loss. If you sell - lets say for $11,000 - you would have $1000 taxable gain.

If you exchange Iraqi dinars for other currency - not US dollars - that transaction should be treated as if you sell Iraqi dinars for US dollars and use these funds to purchase another currency. That is similar if you instead of selling your property - exchange it for another property. If your Iraqi dinars are worth $11,000 at the time of exchange - - you would have $1000 taxable gain.

Let me know if you need any help with reporting or you need any clarification.

Sorry if I would not be able to respond promptly.

Lev and other Tax Specialists are ready to help you