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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.

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    I'd bet ordinary income, but can't prove that. – keshlam May 13 '16 at 21:24
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This is taxed as ordinary income. See the IRC Sec 988(a)(1).

The exclusion you're talking about (the $200) is in the IRC Sec 988(e)(2), but you'll have to read the Treasury Regulations on this section to see if and how it can apply to you. Since you do this regularly and for profit (i.e.: not a personal transaction), I'd argue that it doesn't apply.

  • Thanks. This confirms what I suspected. One final issue. Where might I report this? On schedule B? As miscellaneous income? – David May 15 '16 at 15:04
  • @David misc income. – littleadv May 15 '16 at 23:32
  • Something else occurred to me. I assume this is considered unearned income, rather than earned income? – David Jun 16 '16 at 0:08
  • it is unearned, yes – littleadv Jun 16 '16 at 3:47

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