Q about section 988 (foreign currency) gains and losses

[tangofan]

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:

1. 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?
   
   
2. 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?
   
   
3. 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.

[DaveF1006 · Accepted solution]

Let's address each one of these issues directly.

1. In your first example, the gain is $2. You are correct with this calculation.
2. 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.  
3. 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.

[tangofan]

@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:

1. 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.)
2. If any transactions remain after step 1, total up those remaining transactions and report the net gain or loss as "Other Income".
3. 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. 

[MS456]

Hello Tax Experts, I have a question similar to this but slightly different. I need to show foreign currency loss in the foreign CD and want to confirm that it should be shown as ordinary loss on tax return. I transferred $25K in 2008 to India (in INR currency) and I invested the money in CD which gave good interest for which I paid taxes in US over the years by converting to USD using that year's exchange rate. In 2023, I converted that whole CD amount to USD . When I calculated the cost basis (by including all interests reinvested at different exchange rates), I can see I have a total of $30K loss. Can I show this as ordinary loss? (At least based on this article http://publications.ruchelaw.com/news/2014-05/Vol.1No.04-03_Tax%20101-FX.pdf , these should be treated as Section 988 transactions). Can you please confirm if my understanding of the article is correct and tell me how I can use TurboTax to show section 988 transactions (and the total ordinary loss)? Thanks for your help!!

[DaveF1006]

This is not correct. In Coordination with section 988(c)(1)(C)(ii). No exchange gain or loss is recognized with respect to the following transactions.

(A) An exchange of units of nonfunctional currency for different units of the same nonfunctional currency;

(B) The deposit of nonfunctional currency in a demand or time deposit or similar instrument (including a certificate of deposit) issued by a bank or other financial institution if such instrument is denominated in such currency. This is referring to conversion losses.

C. Thus gains or losses are not recognized in Section 988 transactions. 

Recognition and Gains and Losses of 988 Transactions