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-   -   Hello - looking for long term in US advice (https://britishexpats.com/forum/usa-57/hello-looking-long-term-us-advice-830757/)

lansbury Apr 14th 2014 10:51 pm

Re: Hello - looking for long term in US advice
 

Originally Posted by Owen778 (Post 11218849)
I did some more investigating, which eventually led me to page 30 of IRS publication 525.

http://www.irs.gov/pub/irs-pdf/p525.pdf

This is the relevant section:

I don't believe I have a gain on a foreign currency transaction. I have not sold currency and purchased it back at a profit.

It comes back to the IRS instructions:

When valuing currency of a foreign country that uses multiple exchange rates, use the rate that applies to your specific facts and circumstances. For example, if you have a single transaction such as the sale of a business that occurred on a single day, use the exchange rate for that day. However, if you receive income evenly throughout the tax year, you may translate the foreign currency to U.S. dollars using the yearly average currency exchange rate for the tax year.
I understand that to mean you should use the exchange rate on the day you receive the payment, but for regular payments you can choose to average it out.

If the money stays in the UK and is worth x in dollars at the end of 2013 and x plus 10% at the 2014 because the exchange rate shifted, would you say I have to pay capital gains tax on that 10%?

Pulaski Apr 14th 2014 11:04 pm

Re: Hello - looking for long term in US advice
 

Originally Posted by lansbury (Post 11219014)
You can suspect but how do you calculate it. If I only had to pay US tax if and when the money was changed into dollars that would be easy, and I would agree the rate I got would be the rate to use for taxes. But I have to pay on my income regardless of which currency it is in. If you can only apply an exchange rate if there has been an exchange, what rate do you apply to money that hasn't been exchanged but on which tax has to be paid, zero?

In 2014 I will exchange about £30k for dollars. Some of that was received in 2013, and at the end of 2014 there will still be a chunk of my 2014 UK pension in the UK. I guess I could work out the average rate I got for the year and apply that to the 2014 pensions, then go back and see if what I got was more or less than the 2013 rate, and work out any gains or losses on that part of the money. But it is a lot easier to just use the IRS average rate and for practical purposes I doubt it makes a difference of more than a couple of hundred dollars or so in tax.

In theory the calculation for FX gains losses would be to calculate the number of USD you would have received on the day you received GBP, and total that up for the year, then total up the number of USD you actually received after conversion from GBP.

It is actually a fairly straight forward calculation, and per IRS rules you would be fully justified in using the IRS average rate for the "base" half of the calculation. For example if you received £625/mth, and the IRS average rate is $1.6/£1, your "base" dollar amount is $1,000/mth. If however through canny timing of your conversions to USD you achieve actual receipts of $12,500, then the $500 is an FX gain chargeable to capital gains tax. :nod: .... Obviously with you holding GBP over the year end there would be some prorating to do.

Originally Posted by lansbury (Post 11219079)
I don't believe I have a gain on a foreign currency transaction. I have not sold currency and purchased it back at a profit. ....

You most certainly do have a gain (or a loss). On the day you receive GBP they are worth $x, but by timing your conversion you receive $y, and you appear quite pleased with yourself because $y > $x. The difference is an FX gain, and chargeable to capital gains tax.

lansbury Apr 15th 2014 12:50 am

Re: Hello - looking for long term in US advice
 
That makes it a bit of a nightmare. I will have to keep careful records of when I received the money, and what it was worth in dollars. Then when I transfer money track it back to the days it was received and how much I actually got as an exchange rate. Keep track of each transaction profit or loss and declare the total on my tax return.

Even if I use the average of the various rates I actually get for the year, I would still have to go back and check for any money not transferred in the same year as it was received. I shall have to go back and raise this with my CPA because he has not raised any objections to the way I was doing it.

MidAtlantic Apr 15th 2014 12:13 pm

Re: Hello - looking for long term in US advice
 

Originally Posted by Pulaski (Post 11218877)
Surely you can only apply an exchange rate when there has been an exchange? If you did a simple transfer of the GBP receipts into USD in their entirety and at a fixed time after receiving each credit, e.g. next day, then the average rate would make sense, but once you start accumulating GBP receipts and trying to time the conversion into USD at a better rate, then I suspect you have foregone the option to use the average rate for "regular" receipts.

But you might leave a pension payment in the UK for ever and never have an actual exchange. You still have to declare it on your US taxes and the IRS says you can use their average rate for the tax filing.

Pulaski Apr 15th 2014 12:34 pm

Re: Hello - looking for long term in US advice
 

Originally Posted by MidAtlantic (Post 11219867)
But you might leave a pension payment in the UK for ever and never have an actual exchange. You still have to declare it on your US taxes and the IRS says you can use their average rate for the tax filing.

You're muddling two things: income tax on the income, which is calculated at the IRS average rate, and capital gains tax on the gain resulting from the change in exchange rate. If you receive £625/mth and the average rate is 1.6, you'll pay income tax on $12,000. If you move the whole £7,500 to the US on 12/31 when the actual rate is 1.65, you will receive $12,375 into your account, and the $375 is a chargeable capital gain.

Of course, as noted fairly recently in another thread here on BE, this is all rather esoteric, likely not done by many people, and unlikely to be a big deal for the IRS either, and that is supposing that an audit even noticed it. .... If you kept it in the UK and used it to fund trips to the UK and Europe the exchange "gain" would get lost in the wash anyway.


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