Crypto payments from offshore broker forex gains

[David2023]

I'm looking to capitalize on the forex market & use offshore brokers to make withdrawals. The brokers will pay the withdrawals out in crypto. What exactly would I be taxed on? ...The crypto I receive and sell (at relatively the same price/value)  to then transfer to my bank? ...the gains I made from the broker?...the type of of investment I gained from (forex)? Something else?

[LoriLeighEA1]

Thanks for joining us today, David2023!

Crypto currency owned for one year or less before spending or selling it: 

The profits are typically taxed at your ordinary income rate.

If you held it for more than one year, any profits are considered long-term capital gain tax rates.

Forex trades can be taxed differently:

If you trade 1256 contracts with Forex, your trades are taxed at 60% long-term capital gains and 40% short-term capital gains. If you're trading 988 contracts, you treat losses and gains as ordinary income. The investor can choose to trade as either 1256 or 988. Individuals must decide which to use by the first day of the calendar year. https://www.law.cornell.edu/uscode/text/26/988

Here is a great link that goes into more details:

https://www.investopedia.com/articles/forex/09/forex-taxation-basics.asp

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[Terri Lynn]

Good afternoon, David 2023! Thank you for joining us!

You asked   " The brokers will pay the withdrawals out in crypto. What exactly would I be taxed on? ...The crypto I receive and sell (at relatively the same price/value)  to then transfer to my bank? ...the gains I made from the broker?...the type of of investment I gained from (forex)? Something else?"

Inferring,  these are the actions you would be taking, I am listing the step, and the tax implication of each:

1. You trade Forex,you will have normal Forex gains/losses. This will be taxed as ordinary income if they are section 988, or if they  are  section 1256 contracts they will be taxed as capital gains or losses.
2. You withdraw crypto currency from the broker, this in itself, is not a taxable transaction. if you convert US dollars to crypto, then it’s the purchase of a capital asset.
3. You then convert this crypto into cash. This would be consideed  a taxable sale and you could potentially have a gain or loss depending on your basis. and whether or not you have fees associated with the sale.

Here are some additional resources you may find helpful:

• Cryptocurrency Info Center 
• Overview of IRC Section 988 Nonfunctional Currency Transactions 
• Section 988 

Hopefully this information helps!

Terri

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[David2023]

Thanks for your reply, Terri. What you said makes sense, but I still have a few more questions.

Am I to assume that a broker being regulated or not has nothing to do with gains/losses I realize through trading forex (typically, if brokers are unregulated, they do not fulfill regulatory filing requirements)? I would think that if they aren't reporting trades people make, all profit/loss is not recognized as a tax event for 988 or 1256 election...

Regarding crypto purchase and selling, an example scenario would be as follows:

I purchase $100 worth of bitcoin, then transfer all of it into a broker account (bringing bitcoin wallet to $0). With the broker, I manage to add to the account balance. I then withdraw $100 and have it transferred to my bitcoin wallet. I then convert exactly $100 into cash (bringing bitcoin wallet to $0).

Since I purchased $100 of bitcoin and then later converted that same $100 back to my bank account, I assume there is nothing to tax...correct?

Another scenario in question is if I start with a bitcoin wallet balance of $0 & then have $300 worth of bitcoin transferred to my wallet (from an unregulated broker, or even as a gift from a friend, etc.) and then convert the bitcoin to cash. Is the origin of the bitcoin determined and therefore necessitating the correct tax form?

[Terri Lynn · Accepted solution]

Good evening and hello  again, David 2023.

You asked the followimg additional questions:

"if brokers are unregulated, they do not fulfill regulatory filing requirements)? I would think that if they aren't reporting trades people make, all profit/loss is not recognized as a tax event for 988 or 1256 election..."

You are correct that  many Forex brokers are not required to provide a 1099-B form,  you are still expected to keep accurate records and report all of  your trading activity to the IRS. Afterall, the IRS does require  all residents and citizens of the US, to report all worldwide income.

Forex traders usually fall into Section 988 or Section 1256.

• Section 988 This is the default section that most Forex traders will fall into.  As such, these gains and losses are considered ordinary income, and are  taxed at your normal tax rate.
• Section 1256 Forex traders may also qualify for a considerably lower tax rate. To opt-out of the Section 988 tax, you need to make an internal note in your books and file the change with your accountant. Profits under this type are treated as capita gains/losses and are taxed as 60% long-term and 40% short-term.

In regards to the two specific examples you gave, yes, you are correct!

As the formula for calculating gains and losses in your first example would be: 

• Capital Gain = FMV at the time of sale - cost basis 

The formula for calculating gains and losses as in your second example, where it was gifted to you can be a little more complicated  as your cost basis can vary depending on the specifics of one's situation.

• If the value of your gift has gone up since you received it, your cost basis is equal to the gift giver’s  cast basis, which is the fair market value when the gift giver originally received it.
• If the value of your cryptocurrency gift has gone up since you originally received it, but is still lower than the gift giver’s original cost basis. Then there would be no capital gain or loss to be reported.
• If the value of your gift has gone down since you received it, your basis is equal to whichever is lower: the gift giver’s cost basis, or the fair market value of the crypto at the time the gift was given.

Here are a couple links that you may find helpful:

• Crypto Investors 
• TurboTax Investor Center

Hopefully this helps!

Thanks again, for joining us again today!

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