Foreign stock taxation

Discussion in 'Tax' started by Eugene S., Jan 31, 2005.

  1. Eugene S.

    Eugene S. Guest

    I'm a U.S. resident, and I have a broker account that allows
    me to trade stocks on foreign exchanges ( InteractiveBrokers
    ). Money in the account is denominated in euros. During 2004
    I've performed several trades with stocks of European
    companies.

    Now I'm trying to gather the info about taxation of this
    income. ( BTW, I'm surprised how hard it is to find.
    700-page "2005 income tax" book does not even touch this
    subject. There seems to be no direct data on the IRS site,
    either. ) From what I've managed to gather, I see the
    following picture.

    1. Each transaction is treated as if it were performed in
    dollars, using the exchange rate on the date it took place.
    E.g. if I bought 100 shares of X for 10 euros each when
    exchange rate was 1 euro = $1.20 and sold them for 10 euros
    when 1 euro = $1.22, I have capital gains of $20.

    2. Euro exchange rate has risen since the time I've
    converted money in the account into euros. However, I don't
    have to pay taxes on this gain until I convert money back
    into dollars.

    Can anyone confirm or disprove this?

    Thanks

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    Eugene S., Jan 31, 2005
    #1
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  2. Eugene S.

    D.F. Guest

    Eugene S. wrote:

    > I'm a U.S. resident, and I have a broker account that allows
    > me to trade stocks on foreign exchanges ( InteractiveBrokers
    > ). Money in the account is denominated in euros. During 2004
    > I've performed several trades with stocks of European
    > companies.
    >
    > Now I'm trying to gather the info about taxation of this
    > income. ( BTW, I'm surprised how hard it is to find.
    > 700-page "2005 income tax" book does not even touch this
    > subject. There seems to be no direct data on the IRS site,
    > either. ) From what I've managed to gather, I see the
    > following picture.
    >
    > 1. Each transaction is treated as if it were performed in
    > dollars, using the exchange rate on the date it took place.
    > E.g. if I bought 100 shares of X for 10 euros each when
    > exchange rate was 1 euro = $1.20 and sold them for 10 euros
    > when 1 euro = $1.22, I have capital gains of $20.
    >
    > 2. Euro exchange rate has risen since the time I've
    > converted money in the account into euros. However, I don't
    > have to pay taxes on this gain until I convert money back
    > into dollars.


    Not so. For stocks you don't have to pay capital gains tax
    until you sell the stock, even if you leave the sale
    proceeds in euros for a while. You need to pay tax on the
    dividends when they are paid, even if you leave the proceeds
    in euros for a while.

    << ------------------------------------------------->>
    << The Charter and the Guidelines for submitting >>
    << messages to this newsgroup are at www.asktax.org >>
    << ------------------------------------------------->>
     
    D.F., Feb 1, 2005
    #2
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  3. Eugene S.

    Guest

    > I'm a U.S. resident, and I have a broker account that allows
    > me to trade stocks on foreign exchanges ( InteractiveBrokers
    > ). Money in the account is denominated in euros. During 2004
    > I've performed several trades with stocks of European
    > companies.
    >
    > Now I'm trying to gather the info about taxation of this
    > income. ( BTW, I'm surprised how hard it is to find.
    > 700-page "2005 income tax" book does not even touch this
    > subject. There seems to be no direct data on the IRS site,
    > either. ) From what I've managed to gather, I see the
    > following picture.
    >
    > 1. Each transaction is treated as if it were performed in
    > dollars, using the exchange rate on the date it took place.
    > E.g. if I bought 100 shares of X for 10 euros each when
    > exchange rate was 1 euro = $1.20 and sold them for 10 euros
    > when 1 euro = $1.22, I have capital gains of $20.
    >
    > 2. Euro exchange rate has risen since the time I've
    > converted money in the account into euros. However, I don't
    > have to pay taxes on this gain until I convert money back
    > into dollars.


    The rules dealing with foreign currency are complex. Many
    of the rules are contained in section 988 of the Internal
    Revenue Code and in the 988 regulations.

    You should treat the foreign currency as though is it
    property and not as though it is money. IRC Sec.
    988(c)(1)(C). As a US person with most of your transactions
    denominated in US dollars, your "functional currency" is US
    dollars. IRC Sec. 985(b). When you buy or sell foreign
    currency it is as though you are buying or selling property.

    Once you start to think in terms that foreign currency is
    property, you need to understand that an "exchange" of
    property is taxable just like a sale of property. Thus, if
    you "exchange" foreign currency for stock or another asset,
    you will recognize a currency gain or loss.

    For example, you take $120 and convert it into 100 Euros
    (exchange rate of 1 Euro = $1.20). You have purchased
    property with a tax basis of $120. IRC Sec. 985(a). If you
    immediately take the 100 Euros and purchase an investment,
    then you have exchanged one type of property (foreign
    currency) for another (stock). This exchange is a taxable
    transaction. Because the purchase of Euros was immediately
    followed by the purchase of stock, your currency gain or
    loss was zero.

    If you converted the dollars into Euros, but delayed the
    purchase of the stock, then when you bought the stock, you
    would have a potential currency gain or loss on the Euros
    (assuming exchange rates changed). Remember, your US tax
    basis in the 100 Euros is $120. If the exchange rate is 1
    Euro = $1.22 (Euro has appreciated) on the date you purchase
    the stock, then you have a gain on the Euros. Tax basis in
    the Euros is $120 and FMV of the Euros is 122. Thus, you
    have a currency gain of $2.

    Since you acquired the stock with Euros that had a FMV of
    $122, your US tax basis in the stock is $122.

    When you sell the stock for Euros, you have exchanged stock
    for Euros. This exchange will require the recognition of
    gain or loss. Continuing the example in the immediately
    preceeding paragraph, your US tax basis in the stock was
    $122. If you sell the stock and receive 105 Euros and the
    exchange rate on the date of sale is 1 Euro = $1.24, then
    the value of the stock on the date of the sale was $130.20
    (105 X 1.24). You have a gain (presumably capital) on the
    exchange of the stock of $8.20 [130.2-122].

    You have disposed of stock and acquired 105 Euros. Your US
    tax basis in the Euros is now $130.20. When you dispose of
    those Euros you will again calculate a gain or loss. Just
    about any type of disposition of the Euros will trigger gain
    or loss, including converting the Euros into US dollars.

    You also need to consider the character of the gain or loss.
    As mentioned above, the gain on the exchange of the stock
    of $8.20 was probably capital gain. However, currency gains
    and losses when engaging in investment type activities are
    ordinary gains and losses. IRC Sec. 988(a)(1)(A) and 988(e).

    Another question (which I don't know the answer to) is
    whether the currency gains and losses are netted to come up
    with net ordinary gain or loss. This could be important
    because investment related currency losses will be subject
    to the 2% floor on miscellaneous itemized deductions. The
    question is whether the gross amount of the currency gains
    must be included "above the line" and then the gross amount
    of the losses shown "below the line" (similar to gamblers),
    or whether a net gain (loss) is shown above (below) the
    line.

    Good luck.

    << ------------------------------------------------->>
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    << messages to this newsgroup are at www.asktax.org >>
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    , Feb 3, 2005
    #3
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