I live near the border with Mexico have found a way to make some money trading currencies when I go over for the afternoon. Basically, I can withdraw money in pesos at an atm machine from a checking account and buy back dollars at a casa de cambio (exchange house). For instance, at times one could take out around $900 from the atm and wind up with more than $950 from the exchange house. I believe this is a simple form of what is called arbitrage currency trading. It helps to have account that levies no currency transaction fees, and for which all atm fees are refunded at the end of the month.
My question is how is this taxed by the feds, as a short-term capital gain or as ordinary income. Visa sets the rate daily for buying pesos, but prices for dollars may fluctuate modestly at the exchange houses over the course of a day.Thus, most or all of the spread is likely not due to currency fluctuations. Also, the tax code includes a provision allowing tourists to exempt $200 in currency profits per trip, but I am not sure this would apply in this case. Still, I would like to be sure.
