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I have a question on the tax implications on my foreign currency savings and currency trades. I moved to the USA in 2014 on an 3-year visa and am tax resident for part of the year. Following my move I opened a US based brokerage account and transferred all my holdings (unchanged) from my foreign brokerage account. This was required as the foreign broker would not accept a "US Person". I also hold a normal foreign bank account with cash EUR, deposited as salary and interest before my move to the USA. My primary currency in my US Brokerage account is EUR.

Since I moved to the US I have made several EUR transfers from my bank account to my brokerage account. Subsequently I converted some of those EUR to USD and one other currency (GBP) and used purchased shares/ETFs in USD and GBP. I have not traded back to EUR and not sold any shares.

My question is - is either of the currency trades (EUR to USD or EUR to GBP) or share purchases liable to trigger an income tax due to currency gain/loss? For example, the trade to USD could be considered against the exchange rate at the time I moved to the USA? Or the beginning of 2014? Or when I was paid the original EUR? Normally I would say a gain is triggered only when converting back to EUR, but since taxes are calculated in USD I am not sure what would be the reference against which a gain/loss would be calculated.

  • Usually you would not pay tax on currency conversion (which is different to currency trading) and you would not pay Capital Gains Tax on any share purchases until you sell them and make a capital gain on them. – Victor Jan 15 '15 at 21:02
  • Victor - thanks for the comment. I wonder when a currency conversion is considered a trade for tax purposes? I use the different currencies as a hedge as I am not sure where I will live long term and want to ensure my savings and investments are not too exposed to currency shifts. – Taco Jan 15 '15 at 23:54
  • @Victor that's not entirely correct. The US imposes "Exit tax" of deemed gain even if unrealized on many of its residents who are leaving back to their home countries. – littleadv Jan 16 '15 at 4:18
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It's really hard to understand what you're telling in your question. Difficult to follow. I'll try to answer the question I think you're asking.

If I have trades in foreign currency, how are they taxed?

You calculate the purchase price in USD on the day of the purchase transaction, and the sale price in USD on the say of the sale transaction. Your capital gain (loss) is then the difference between the USD-value of sale and the USD-value of purchase.

It is very much possible that in EUR you'll have a loss, but due to currency fluctuations you'll have a gain in USD. You'll be taxed on that gain.

I transferred my holdings to a US brokerage as is, will I be taxed on the gains?

Yes, you will, including on the gains before the transfer.

I have deposits in my foreign account before I become US tax resident, will I be taxed on them?

No.

I have deposits in my foreign accounts after I become US tax resident, will I be taxed on them?

If they represent taxable income - yes.


As a public service announcement - don't forget to file your FBAR. Penalties for not filing are astronomical.

  • Littleadv, thank you for the reply. To clarify, I am not so worried about the shares, it's pretty clear how to calculate capital gains (or losses) on that. What I am more concerned about is how the IRS treats currency exchange, whether for the purpose of buying shares, currency hedge or otherwise. For example, if I exchange a (substantial) amount of EUR for USD, will that be compared to when I received the EUR originally to calculate a currency gain/loss? What if I transfer EUR to GBP and back to EUR? To clarify, the EUR were originally received as salary, not from a USD to EUR exchange. – Taco Jan 16 '15 at 19:58
  • @Taco the IRS doesn't treat currency exchange. – littleadv Jan 16 '15 at 23:05
  • Is it treated as a capital gain/loss or an ordinary one? I have read extensively on mortgages on personal homes and changes in exchange rate value of foreign mortgages on day of purchase/sale are treated as ordinary gains/losses. Changes in value of associated houses are treated as capital gains / losses. – Eric Mar 18 '15 at 3:21
  • @Eric not sure I follow what you're asking. Better ask a proper question with some more details then comment on some other answer – littleadv Mar 18 '15 at 5:18
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    @Eric no, these are not sec 988 transactions. Investing in foreign currency (for example in a Euro bond) is a sec 988 transaction, converting currency coincidental with using it to buy other capital assets is disregarded. – littleadv Mar 19 '15 at 0:40

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