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Q: I bought foreign currency as an investment and expect to resell it and realize a substantial profit. Will that be a taxable event?
Yes, the purchase and sale of foreign currency does result in a taxable event. Currency gains and losses that are incurred in connection with the purchase of an investment will be considered capital in nature and will be subject to capital gains rates depending on the length of time the currency was held. There are different tax rules if the currency purchase was connected to a trade or business.
If the investment was made through the purchase of a foreign currency contract, there would be a tax consequence even if the contracts (known as Section 1256 contracts) remained open at the end of your tax year. In that case, the open contracts are treated as if they were sold at their fair market value on the last day of the year. Sixty percent of the gain or loss would be treated as long term and 40 percent would be treated as short term. Upon the disposition of the contract, the ultimate gain or loss would be adjusted for the amounts previously reported.
The rules surrounding foreign currency transactions can be complicated, so be sure to contact a CPA who is knowledgeable in this area if you have any additional questions.
Have a question for a CPA? Ask it here.
Jennie Hoopes, CPA, a team member with Sweeney Kovar, LLP, in Danville, Calif. You can reach her at (925) 648-3660(925) 648-3660 or Jennie@cpaskllp.com.