In my brokerage account I hold stocks denominated in foreign currencies (EUR and DKK). When I receive dividends for those stocks or very occasionally sell a portion of those stocks as well, I receive proceeds in foreign currency, which I then convert to USD via a forex transaction. So I'm not engaging in active forex trading per se (speculating on future currency exchange rates), rather the fact that I'm acquiring foreign currency is just a side effect of the stocks that I am picking. It is my understanding that such gains (or losses) fall under section 988. My broker issues a 1099 for the dividends and the stock sales, but the proceeds in USD after the forex sale are usually different. E.g. I might receive a dividend of 100 EUR, which my brokers lists as 110 USD on the 1099, but the forex transaction will net me 112 USD. Here are my questions:I am calculating my section 988 gain (or loss) for dividends by using the 1099-DIV amount (e.g. 100 USD in the example above) as the cost basis for the forex transaction. So in the example above I would calculate a foreign currency gain of USD 2. Is this approach correct?I understand that section 988 has an exemption for "personal transactions" with a value below 200 USD. Are the forex sales in the example above considered "personal transactions"?And if these sales are indeed "personal transactions", would I apply the "200 USD" exemption to each individual transaction (sale) or to the net gain or loss at the end of the tax year?Since I generally dispose of the foreign currency gained close to the dividend payment date or stock sale date, there will be some transactions with (generally small) gains and some with (generally small) losses. In my taxes do I have to report gains and losses in separate line items or do I just report a single line item with the net gain or loss?Thank you in advance for any insights you can provide on this.

Let's address each one of these issues directly. In your first example, the gain is $2. You are correct with this calculation.The rules on foreign exchange gains in relation to personal transactions allow an exemption for any gains below $200 on each transaction. Your trading is considered a personal transaction unless you are in the business of currency trading. If your gains are under the $200 threshold per transaction, you do not need to report these gains. if you have separate transactions that result in losses, you are entitled to claim your losses. These do not need to be reported separately in the the other income section of your return but when you list the loss, you would label this as Forex Trading Loss and record the loss with a minus sign in front of the total. just keep your records on all the transactions.Just as a reminder, make sure this is reported as other income and not in the investment section of your return. Currency trading results in an ordinary gain or loss and not a capital gain of loss. Just a reminder. Please rEach out if you have further questions.

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tangofan

Solved

Q about section 988 (foreign currency) gains and losses

Forum|Forum|3 years ago
January 24, 2023
1 reply
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In my brokerage account I hold stocks denominated in foreign currencies (EUR and DKK). When I receive dividends for those stocks or very occasionally sell a portion of those stocks as well, I receive proceeds in foreign currency, which I then convert to USD via a forex transaction.

So I'm not engaging in active forex trading per se (speculating on future currency exchange rates), rather the fact that I'm acquiring foreign currency is just a side effect of the stocks that I am picking. It is my understanding that such gains (or losses) fall under section 988.

My broker issues a 1099 for the dividends and the stock sales, but the proceeds in USD after the forex sale are usually different. E.g. I might receive a dividend of 100 EUR, which my brokers lists as 110 USD on the 1099, but the forex transaction will net me 112 USD.

Here are my questions:

I am calculating my section 988 gain (or loss) for dividends by using the 1099-DIV amount (e.g. 100 USD in the example above) as the cost basis for the forex transaction. So in the example above I would calculate a foreign currency gain of USD 2. Is this approach correct?
I understand that section 988 has an exemption for "personal transactions" with a value below 200 USD. Are the forex sales in the example above considered "personal transactions"?
And if these sales are indeed "personal transactions", would I apply the "200 USD" exemption to each individual transaction (sale) or to the net gain or loss at the end of the tax year?
Since I generally dispose of the foreign currency gained close to the dividend payment date or stock sale date, there will be some transactions with (generally small) gains and some with (generally small) losses. In my taxes do I have to report gains and losses in separate line items or do I just report a single line item with the net gain or loss?

Thank you in advance for any insights you can provide on this.

Best answer by DaveF1006

Let's address each one of these issues directly.

In your first example, the gain is $2. You are correct with this calculation.
The rules on foreign exchange gains in relation to personal transactions allow an exemption for any gains below $200 on each transaction. Your trading is considered a personal transaction unless you are in the business of currency trading.
If your gains are under the $200 threshold per transaction, you do not need to report these gains. if you have separate transactions that result in losses, you are entitled to claim your losses. These do not need to be reported separately in the the other income section of your return but when you list the loss, you would label this as Forex Trading Loss and record the loss with a minus sign in front of the total. just keep your records on all the transactions.

Just as a reminder, make sure this is reported as other income and not in the investment section of your return. Currency trading results in an ordinary gain or loss and not a capital gain of loss. Just a reminder. Please rEach out if you have further questions.

DaveF1006Answer

Let's address each one of these issues directly.

In your first example, the gain is $2. You are correct with this calculation.
The rules on foreign exchange gains in relation to personal transactions allow an exemption for any gains below $200 on each transaction. Your trading is considered a personal transaction unless you are in the business of currency trading.
If your gains are under the $200 threshold per transaction, you do not need to report these gains. if you have separate transactions that result in losses, you are entitled to claim your losses. These do not need to be reported separately in the the other income section of your return but when you list the loss, you would label this as Forex Trading Loss and record the loss with a minus sign in front of the total. just keep your records on all the transactions.

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tangofanAuthor

@DaveF1006 thank you so much for your in-depth response. Please allow for two follow-up questions/remark s to make sure that I understand everything correctly.

I am not in the business of currency trading, so it is great to know that my transactions can be considered "personal transaction" and I can take advantage of the associated exemption.

My follow-up question:

You mentioned that the exemptions applies to to personal transactions with a gain below $200 per transaction.
Am I correct in assuming that this also applies to personal transactions with a loss of less than $200 , so such a transaction would equally be ignored? Or are small losses treated differently than small gains with regard to this exemption?

As an overall summary of (my understanding of) your answer, this would be the approach that I'd need to take:

Compute the currency gain or loss for each foreign currency sale transaction separately. Ignore transactions with a gain of less than $200. (Also if the assumption in my previous question is true, ignore transactions with a loss of less than $200 as well.)
If any transactions remain after step 1, total up those remaining transactions and report the net gain or loss as "Other Income".
If no transactions remain after step 1 (that is all transaction fall under the exemption for personal transactions), nothing needs to be reported.

Please let me know, this summarizes your answer correctly.

Thanks again for your help. I appreciate it a lot.

DaveF1006

My understanding on this provision is that you may claim a loss on any amount of a transaction. The exemption is only for a gain of less than $200 for each transactions if used for personal purposes.

Looking over your summaries, total all your transactions over $200 and combine them with your losses to determine what total to record as other income.

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