Iraqi dinar

My recent blog, ďIs The Iraqi Dinar Worthless Paper Or Maker Of Millionaires?Ē generated a firestorm of comments and opposing views. Here are some additional tax answers to questions and comments made.

Various IRS publications discuss tax rules for physically-held currency held for personal-use, mentioning capital gains treatment on gains, and no tax-deductible loss (capital or otherwise) on personal-use losses. These are standard tax rules for personal-use property. Taxpayers may only deduct capital losses on investment (Section 212) or trade or business (section 162) property.

Taxpayers who purchase Iraqi dinars generally are buying dinars for investment purposes, not personal-use. An example of personal use would be buying euros to use while traveling in Europe for personal reasons.

When it comes to physically-held currency and forex transactions (spot and forward) held for investment or business use, Section 988 (foreign currency transaction) tax rules apply. Section 988 is ordinary gain or loss tax treatment. Good news, the capital loss limitation of $3,000 per year does not apply to Section 988 ordinary losses.

An investor holding forex as a capital asset may file a contemporaneous election to opt-out of Section 988 into capital gains and loss rules, otherwise known as the capital gains election. But if you invest in physically-held currency, Section 988 does not permit you to opt-out of Section 988.

In summary, if you heard from an accountant, the IRS or a friend that capital gains apply by default to physically-held currency, that answer is only correct for personal-use sales of physically-held currency. Itís incorrect for the sale of physically-held currency or forex held for investment or business purposes. And donít forget, you canít take a tax loss of any kind (capital or ordinary) on the sale of personal-use physically-held currency either.