justadude

I'm a new permanent resident and moved my foreign assets to US bank but did not convert the amount to USD right away. After few months, I converted to USD and have suffered some losses in USD terms. Will I be able to claim forex losses on my taxes per section 988? The broker does show the forex losses in realized gains/loss reports on their website.

Pulaski

IIRC FX losses can only be used to reduce or eliminate FX gains, and cannot otherwise be used to reduce income or gains on other assets.

lansbury

Pulaski is correct forex losses cannot be used to offset income. Of course the IRS plays it both ways, if you make a forex gain that is taxable.

It is also complicated by when the assets should have originally been valued in US dollars. Sometimes it just isn't worth looking too hard to save a few bucks taxwise.

durham_lad

I agree, simply not worth the hassle or the possibility of triggering an IRS audit.

justadude

Thank you for your opinions. The amount is quite substantial for me to not research this and even take a chance with IRS audit. Of course, I will end up talking to a tax lawyer about this after I research it myself. According to this, http://www.worldwide-tax.com/forex/h...rex_trader.asp, it seems like forex losses can be used to offset income according to section 988. The only problem is that the broker has not given me a Form 1099 yet.

lansbury

That link IMHO refers to trading in Forex. You are valuing an asset, it is (or was) valued in GBP and now you are changing its value to US Dollars. I don't see that as a loss trading currency. 1099's should have been received by February 19th, if your broker is in the US and you haven't received one that might be a clue.

Whatever the outcome I would be very interested in what advice you receive from a tax lawyer if only from a learning point of view.

justadude

Thanks for your input. Actually it was non-functional currency (cannot use GBP in US) rather than a material asset.

I transferred GBP and it stayed as GBP in my US brokerage account. I was hoping that the GBP gets stronger but in did not and after few months I converted it to USD thereby creating a loss in USD terms. The brokerage did not generate a 1099 because all forex transactions default to section 988 unless opted out. When opted out, they will be treated as forward forex transactions subjected to Section 1256. I did receive a FX Income worksheet which has the losses documented.

Here is what could have also happened in my case. I could have transferred GBP to GBP and next day converted it to USD. On day after that I could have converted it back to GBP. As you can see, in this scenario you will agree that I did incur a loss when I subsequently sell the GBP for USD. So my inference is that even if I avoided transferring to USD and back to GBP, the losses (of gains) should be forex losses and gains.


Some more information:
greentradertax.com/why-do-forex-forward-dealers-issue-1099s-yet-spot-forex-brokers-do-not/

Pulaski

In order for there to be an FX loss there needs to be a purchase and a sale, you can't have a gain, or a loss, until there has been both halves of the round-trip. ..... So where did the GBP come from? - if it was money/ savings that you held long term/ "forever"/ came from the sale of assets/ investments that you purchased in GBP then exchanging the GBP at a disadvantageous exchange rate, while disappointing for you, isn't "a loss" for tax purposes. And tgo be clear, transfering the money you already owned into the US/ into a US brokerage account, is not a purchase for the purposes of calculating an FX gain or loss. So even if you had made FX gains somewhere, the conversion you made has not created a loss that you could set against those gains anyway.

morpeth

A loss from currency conversion itself is not a loss for tax purposes in the U.S. , and I can't imagine a brokerage firm or bank issuing a 1099 showing a loss.

lansbury

What you could have done is irrelevant, you didn't in fact trade currency. Your asset was worth an amount in GBP when it was transferred to the US, it was kept in GBP and the same number of GBP as was transferred was subsequently converted to dollars. The value of the asset didn't change. It is like playing PowerBall. Winnings are taxable, loses are not deductible.

What morpeth says is the way it has been applied todate, if it wasn't the brokerage fee might become an allowable deductible. But I wish you well if you decide to pursue it.

justadude

Thank you for your input. I did further research and I believe I'm correct. This is from IBKR website: http://www.interactivebrokers.com/en...t/tax-fxpl.php from whom I received a FX income worksheet which shows the forex loss.

Specifically, The forex income and loss information included on the Forex Income Worksheet is based on the following rules:
Any transaction that changes the balance of a nonfunctional currency is considered a forex transaction against your functional currency. This includes but is not limited to forex trades, deposits, withdrawals, securities purchases and sales, dividends and interest.
So, in my case GBP is a non functional currency in my account while USD is functional currency. So before the GBP transfer, my non-functional balance was £0.00. As soon as I made a transfer from UK bank to IBKR, my non-functional balance changed which is now considered a forex transaction against my functional currency which is USD. Subsequently when I converted GBP to USD my non-functional currency balance went to £0.00 which again triggered a forex transaction against USD and hence the loss.
Here is section 988 of the tax code: www.law.cornell.edu/uscode/text/26/988
It is always good to hear different opinions and increase one's knowledge this way.

morpeth

The section 988 you refer to doesn't appear at all to support your believe that a loss simply on converting a currency is a deductible loss.

I have dealt with foreign currency issues for myself, employees and companies, for over 30 years, and also taken graduate level
international taxation courses, I have never heard of anyone claiming a foreign currency exchange loss by itself is tax deductible, and top accounting firms in my business experience unaware of this.

However if you are correct you can become very wealthy- as rich individuals , as well as corporations worldwide- who may file taxes in the United States, will pay a lot for this knowledge.

At the very least consult with a good accountant or tax lawyer before you try to take a foreign currency loss as a tax deduction.

Let us know how it goes !

justadude

While what you say may be correct, I would like for you to review the following from IBKR(emphasis is mine):

Forex Income and Loss

The US Internal Revenue Service (IRS) requires that forex income and loss be calculated based on First In, First Out (FIFO) matching. The Forex Income Worksheet includes income and loss data from closed forex spot trades and closed securities trades denominated in a nonfunctional currency.

The forex income and loss information included on the Forex Income Worksheet is based on the following rules:

1. Any transaction that changes the balance of a nonfunctional currency is considered a forex transaction against your functional currency. This includes but is not limited to forex trades, deposits, withdrawals, securities purchases and sales, dividends and interest.
2. A nonfunctional currency cross-currency trade is recognized as two trades against your functional currency.
3. The worksheet shows all closed forex transactions; that is, forex transactions that result in income or loss.
4. All forex income and loss is reported in USD for 1099-eligible clients and in the base currency for all other clients.

The US IRS recognizes forex income and loss on a settlement date basis, but IBKR calculates forex income and loss on a trade date basis. This requires adjustments to be made, and you will see these adjustments on the Forex Income Worksheet.

Point 1 refers to the forex transaction which pertains to my situation.
Point 2 is when for example I have GBP and I switch it to Euro, that will generate two forex transactions in USD which could result in gain or loss

If you click in the IBKR link you can read it exhaustively.

As far as section 988 is concerned, please pay attention to the following(emphasis is mine(:

(C)Special rules for disposition of nonfunctional currency
(i)In general
In the case of any disposition of any nonfunctional currency—
(I) such disposition shall be treated as a section 988 transaction, and
(II) any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).
(ii)Nonfunctional currency
For purposes of this section, the term “nonfunctional currency” includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.

Pulaski

The flaw in your analysis is that the transfer in your circumstances is not an event that has any meaning for the calculation of your FX loss or gain, or for any other tax purpose. You already had the GBP, somewhere else, you didn't acquire them, you just transferred them. Now, if you were a US citizen/ long term resident, who had sold USD to buy the GBP credited to your account then the calculation you explained would make sense.

There are several ways that you could have acquired the GBP that could lead to a base transaction for a later FX loss or gain. A mortgage taken out in the UK is the one we see most commonly here on BE.

BTW This isn't a subjective opinion.

morpeth

Actually I read that before I responded to you.

I think you are confused on what is 'forex' income. It is not simply conversion gains or losses- and that brokerage firm probably won't issue you a 1099 for conversion loss- and if they do, definitely speak to a good accountant or tax lawyer before you attempt to claim a deduction for such a loss, which you should do anyway if you are planning to take such a deduction.

As I understand it you put money into a brokerage account, and when you took it out it was worth less upon conversion back to the original currency. That is not a loss from a trading or business transaction. nor even a 'spot' transaction for that matter. What you quote above indicates this is what they are referring to "The Forex Income Worksheet includes income and loss data from closed forex spot trades and closed securities trades denominated in a nonfunctional currency."

If I put money into an account and convert it to a currency, then later convert it back to the original currency, the transaction is not a spot trade.

However I am always open to the possibility I may be wrong, so do let us know if any reputable accountant or tax lawyer indicates you can take a deduction for this.