Is There a Tax Efficient Way to Sell Foreign Currency?

Many people may be holding foreign currency that has or will (hopefully) appreciate in value. These folks may be wondering how to lessen the amount of taxes that they will have to pay when they convert their foreign currency for a profit or gain.

Internal Revenue Code Section 1031allows for the tax deferred exchange of certain types of property; however, Section 1031(a)(2) excludes many other types of property...specifically "Notes", "Securities" and "Choses in Action". Arguably, currency falls within the scope of these excluded property types.

Currency is defined by Blacks Law Dictionary as "coined money and such banknotes or other paper money as are authorized by law and do in fact circulate from hand to hand as the medium of exchange".

The Treasury Regulations help people understand how the Internal Revenue Code will be applied by the IRS. Notably on point, Treasury Regulation 1.1031(a)-1(2) indicates that an exchange will not be like-kind and will not be within the provisions of Section 1031 if "as part of the consideration, the taxpayer receives money or property which does not meet the requirements of 1031(a)".

In 1976, there was a Revenue Ruling (Rev. Rule 76-214; 1976-1 C.B. 218) where a taxpayer was allowed to exchange Mexican 50-peso gold coins for Austrian 100-corona under Section 1031; however, that was because this was essentially a like-kind exchange of "gold bullion-type coins" for "gold bullion-type coins" that were of the same nature and character. It was not really an exchange of foreign currency, but an exchange of the underlying gold material that the coins were made of. The investment exchanged was gold, not currency. In Revenue Ruling 76-214, the coins are clearly distinguished as not being "circulating mediums of exchange". The Revenue Ruling stated that neither of the two types of gold coins were "currency, or money as such term is used in Section 1031 of the Code, since money in its usual and ordinary acceptation is synonymous with currency."

Is There Another Tax-Efficient Option?

Deferred Sales Trusts for the Sale of Foreign Currency

Normally, a currency that is traded on an established exchange, like Forex, is not appropriate for a DST; however, because there is not currently a market for the Dinar, a Deferred Sales Trust (or "DST") is a good method to consider. In a DST, a transaction is re-structured to make what would be an "immediately taxable sale" into a "deferred-payment transaction", where taxes are recognized slowly over time as the payments are received. Under Internal Revenue Code Section 453, an installment sale is defined as a sale of property where you receive at least one payment after the tax year of the sale. Deferred Sales Trusts are used to transform the direct sale into an installment sales. Under Section 453, if the sale of property qualifies as an "installment sale", then the you may use the installment method of accounting to "defer recognition" of the gain (or profit) until you actually receive these payments in the future.

How would a Deferred Sales Trust Works with Foreign Currency?

The process starts when you convey your foreign currency to a trust owned by a large reputable third party institutional company. The trust then immediately sells the foreign currency on the open market. Next, the trust "pays" you periodic installment payments over time according to a prearranged contract called an "installment agreement." This written and signed contract promises to make fixed-payments to you over an agreed period of time. There are zero taxes to the trust on the sale since the trust "purchased" the foreign currency from the investor for what it sold it for.

Can the Investor Get Access to the Cash Value of the Trust?

If the trust agreement is set up properly, you may be able to borrow up to 65% of the value of the outstanding Deferred Sales Trust amount. This provides you with more liquidity. You can then use the credit line to purchase other investments and start the whole process over again.

This has just been a very simple overview. Deferred Sales Trusts are governed by a complicated set of tax rules. You really need to work with experienced Deferred Sales Trust administrators. Go to or call me toll-free at 1-877-373-1031.

2011 Jeffrey R. Peterson - All Rights Reserved

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.