Reporting gain or loss on currency exchange rates

[Bob Brown]

I have some exchange rate gains and losses from two types of thing:

a) Everbank offers WorldCurrency CDs with are FDIC insured CDs with a
US bank but demonitated in foreign currencies. They report interest
each year on 1099-INT and interest is reinvested in the same currency
as is the principal at maturity. When the CD maturity proceeds are
withdrawn, the payout is in dollars so there is a gain or loss based
on how exchange rates have moved.

b) One of my brokers (Interactive Brokers.com), allows purchase of a
foreign stock even though the account doesn't hold that currency. If
you don't want to be short the currency, you then buy the necessary
amount, but it's not required. Similarly, if you sell a foreign stock
then that foreign currency sits as cash (earning interest) in the
brokerage account until it is sold (converted back to dollars). In
either case, if the currency buy or sell isn't contemperanious with
the stock transaction, there's a gain or loss on the currency position
itself.

Since these are for my individual investments (not part of a
business), I assume these both are capital transactions and reported
on Schedule D, either short or long term based on holding period. Do
people agree with that? As far as labelling it, would I just say so
many Euros with a purchase date of "various"?

Thanks for any suggestions here.

Bob Brown

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[removep...@yahoo.com]

On Jan 18, 9:49 am, Bob Brown <bobabr...@comcast.net> wrote:

> a) Everbank offers WorldCurrency CDs with are FDIC insured CDs with a
> US bank but demonitated in foreign currencies. They report interest
> each year on 1099-INT and interest is reinvested in the same currency
> as is the principal at maturity. When the CD maturity proceeds are
> withdrawn, the payout is in dollars so there is a gain or loss based
> on how exchange rates have moved.
>
> b) One of my brokers (Interactive Brokers.com), allows purchase of a
> foreign stock even though the account doesn't hold that currency. If
> you don't want to be short the currency, you then buy the necessary
> amount, but it's not required. Similarly, if you sell a foreign stock
> then that foreign currency sits as cash (earning interest) in the
> brokerage account until it is sold (converted back to dollars). In
> either case, if the currency buy or sell isn't contemperanious with
> the stock transaction, there's a gain or loss on the currency position
> itself.
>
> Since these are for my individual investments (not part of a
> business), I assume these both are capital transactions and reported
> on Schedule D, either short or long term based on holding period. Do
> people agree with that? As far as labelling it, would I just say so
> many Euros with a purchase date of "various"?

Interest has to be reported on Schedule B.

As for exchange rates, I'm not sure if there is a standardized rule.
I use either

(a) the average exchange rate on the day the interest/dividend was
received, or the stock was bought (for the cost basis) or sold (for
the proceeds)
(b) the average exchange rate for the year of the day the interest/
dividend was received, or the stock was bought (for the cost basis) or
sold (for the proceeds)

Obviously, method (a) is much more tedious as you have a different
exchange rate for every day of the year, whereas method (b) has the
same exchange rate for each day of the year, but a different rate for
different years. But methods (a) and (b) yield different results, so
I wonder if you have to use one method.

You can see exchange rate conversions at http://www.oanda.com/convert/classic.

Finally, don't forget to use the Typical Cash Rate, which is the
interbank rate + 4%. This will usually result in less US income (ie.
less interest, less dividends, but maybe more capital gains). I did
an amended return changing from the interbank rate (in my original
return) to the typical cash rate (in the original return), which
resulted in me getting money back.

[jma...@andrewmitchel.com]

> I assume these both are capital transactions and reported
> on Schedule D, either short or long term based on holding period.  Do
> people agree with that?  

No, I disagree. Currency exchange gains and losses are generally
treated as ordinary income or loss under section 988. While there is
an exception to section 988 for personal transactions, the
transactions you describe would be considered investment transactions
and would be ordinary. The income/loss related to the currency
transactions should be reported on line 21 of Form 1040.

[Bob Brown]

On Wed, 21 Jan 2009 15:13:35 EST, jma...@andrewmitchel.com wrote:

>> I assume these both are capital transactions and reported
>> on Schedule D, either short or long term based on holding period.  Do
>> people agree with that?  
>
>No, I disagree. Currency exchange gains and losses are generally
>treated as ordinary income or loss under section 988. While there is
>an exception to section 988 for personal transactions, the
>transactions you describe would be considered investment transactions
>and would be ordinary. The income/loss related to the currency
>transactions should be reported on line 21 of Form 1040.

So if it's a net loss I report a negative amount on line 21?

Thanks for the input

Bob Brown