Currency Loss

[Edsel]

In 2008, Australia issued govt bonds at 8.75% interest. One of my wealthiest customers purchased $3,000,000 of these, and in a few months, had earned $113,000 in interest.

During this time, the U.S. Dollar gained, and Australian Dollar weakened. My client panicked, and cashed out the Australian bonds for $2,650,000.

I'm seeing this as a capital loss, like $350,000 available at only $3000 per year (unless there is gain activity).

Is anyone aware of any special provision whereby a currency loss of this nature may be deducted currently? It sure would help him - he's got AGI of $4 million, but NONE of it in capital gains.

[BHoffman]

In 2008, Australia issued govt bonds at 8.75% interest. One of my wealthiest customers purchased $3,000,000 of these, and in a few months, had earned $113,000 in interest.

During this time, the U.S. Dollar gained, and Australian Dollar weakened. My client panicked, and cashed out the Australian bonds for $2,650,000.

I'm seeing this as a capital loss, like $350,000 available at only $3000 per year (unless there is gain activity).

Is anyone aware of any special provision whereby a currency loss of this nature may be deducted currently? It sure would help him - he's got AGI of $4 million, but NONE of it in capital gains.

I have no experience with this, but here are a few links I found by googling "currency trading tax":

Here is IRC Sec 988:

http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._988._Treatment_of_certain_foreign_currency_transactions

Here is an article, but can't say if this guy knows what he's talking about:

http://www.ibfx.com/Ibfxu/Catalog/taxes/tax1020.aspx

[Edsel]

Great Sources

Hoffman thank you for yet another helpful response to a tough question. Apparently this transaction, being a debt transaction, is subject to Section 988. If I read it correctly, the taxpayer has the option of treating currency gain or loss as ordinary income. That does seem a little unusual, and I do wonder why anyone would want to treat gain as ordinary income.

Not sure I can read this code section without my head swimming. But I believe all the information is there.

Thanks again...

[BHoffman]

Welcome. Reading the code is about as fun as a root canal.

[Snaggletooth]

NATP Question

I haven't used my annual free question from NATP yet. I think this one is worth sending to them. I hope they give a plain English answer and do not merely send quotes from code or regs. I'll let you know.

[Burke]

Yes, I would be interested in that one too. It is my understanding that trades of currency or bullion is subject to 28% rate gain rules. I would think the trading of a foreign bond would be just like a US bond, capital asset on Sche D. He put USD in and got USD back, so it is a short-term capital loss to him regardless of the fact that devaluation of currency is what caused the loss. Post your answer when you get it. I just used my question for this year. They sent me good cites from TC Memo's and Private Letter Rulings, etc. which I could copy for taxpayer.

[Snaggletooth]

No Response

Burke, I didn't get a response. My question was acknowledged with verbage that I would receive an answer within three days. Acknowledgement received last Friday. They may yet send their opinion. Big bucks involved with this one.

[Burke]

Took 3 days for mine too. I got it in the specified time frame. If it is a real hairy one, and this one may be, they will let you know. Plus they are probably slammed right now.

[Snaggletooth]

Response

I did hear from them a while ago. I'm not good at interpreting what they answered, but I think the gist of it is that the currency loss should be reported as a capital loss. This means loss is limited to $3000 for 2008.

Here is the text of their response: (I don't think the Columbia Sand & Gravel cite is relevant because my client did not delay in converting the dividend checks)

This is reported as a Capital loss due to the fact that the curency conversion was done before the loss was calculated.¶G-7214. Gain or loss on foreign currency—investments. If foreign bonds were paid on maturity in foreign currency and the currency was converted, the loss was a capital loss if the original redemption qualified as a capital loss (retirement of bonds). Both the cost and proceeds were computed at the prevailing rates of exchange on date of sale and purchase. 12 -------------------------------------------------------------------------------- 12 Columbia Sand & Gravel Co, (1952) PH TCM ¶52232 , 11 CCH TCM 794 . A taxpayer who received foreign dividend checks not only realized dividend income in the amount of the exchange rate in U.S. currency on the date of distribution, but he also acquired a basis at that time in that right to payment. Where the taxpayer delayed in converting his foreign dividend checks, he was an investor or speculator in foreign currency and entitled to a capital loss on the difference between his basis and the amount actually received upon conversion. The taxpayer could not net the currency loss against his dividend income. 13

[Burke]

Yup, sounds like a capital loss subj to $3,000 yearly max. When the aforementioned bulliion was sold (at 28% max cap gains rate), it was considered the sale of a capital asset too, and went on Sche D.