Determining foreign exchange gains/losses

andied · Post by **andied** » Sat Jul 21, 2007 1:46 pm

As a USC and resident of Canada, if I were to purchase a US stock with US$ 10000 /CDN$ 10500 and next month sell this stock at the same price as purchased (US$ 10000), but assume the CDN$ has declined in value and this is now equal to CDN$ 11000. I would have a $500 capital gain to report to the CRA(and no gain to the IRS).

However, if the US$ used to purchase this stock, were acquired several years ago and held in savings, and at the time acquired were equal to CDN$ 10400, could this be used as the cost basis?

Probably only "wishful thinking", but with the increase in the CDN$, I am trying to find some way to mitigate my tax exposure.

nelsona · Post by **nelsona** » Sat Jul 21, 2007 2:19 pm

For US, there would no gain, no loss.

For Canada there would be a $500 gain as you say.

But in your second scenario, you would have a loss from the 'sale' of US dollars, whether uyou used this to buy stock or anything else (in one transaction). This is a currency loss, but it would have nothing to do with what you did with the money, just the fact that you held it and lost on it, and then sold it in sufficient quantity to make a $200 loss on it. (Gains and losses of les than $200 are not reportable, otherwise everytime you bough something with $C would be a taxable event in US, and vice versa).

nelsona · Post by **nelsona** » Sat Jul 21, 2007 2:22 pm

don't forget that if you took a big chunk of C$10000 and bought that same stock, you would have to determine if your C$ had increased sufficiently in the time you held it to determine if you had a gain for IRS purposes too.

andied · Post by **andied** » Sat Jul 21, 2007 2:56 pm

Thanks nelsona. If I understand your response, the proposed stock purchase and sale would be reported as a separate transaction, and the currency gain or loss would be reported as different transaction.

How does the CRA/IRS determine dates? If I acquired (through an inheritance)US$20k five years ago, and US$5k each year(from investments) and remove US$10k next week, would it be first in/first out, or an average, etc?

nelsona · Post by **nelsona** » Sun Jul 22, 2007 7:39 am

CRA only allows avererge cost basis, so for your US dollars, you would average the cost.

For IRS you have choice, but, of course this doesn't apply in this instance, since IRS does not consider US dollar a foreign currency.

Just so we are clear, for CRA , you treat all curencies other that c$ as an investment, and each time you use a foreign currency, you are selling part of that investment.For CRA purposes, you really have a stock called "US $".

For IRS. you treat all currencies other that US$ as an investment and each time you receive or sel it, you are buying or selling part of that investment.

For IRS purposes, you really have a stock called "Cdn $". every time you go to the store in Canada you are selling a piece of that investment, and must determine if you have made or lost more than $200 on the transaction.

andied · Post by **andied** » Sun Jul 22, 2007 10:18 am

Thanks again, nelsona. I am mostly seeking to increase my knowledge, and I will probably not open this "can of worms" with either the CRA or IRS.

andied · Post by **andied** » Mon Jul 23, 2007 10:09 am

nelsona, I have one more question. When converting currency exchange, reference is made to the "official" exchange rate from the Bank of Canada or the US Fed; of course taxpayers do not receive this rate. If I actually converted, I would pay a fee to the financial institution of 1% to 2%. As the CRA/IRS require reporting this paper gain(even though I do not actually convert), it seems reasonable that I should be able to claim the paper exchange fee. Perhaps "reasonable doesn't belong in the same sentence with "CRA/IRS".

nelsona · Post by **nelsona** » Mon Jul 23, 2007 10:23 am

If you have proof of what you "paid" for your various currency excahnges, you are free to use these. But you can't simply juice your figures by 2% in either direction.

But when it come to stock purchases, the official excahnge rate is the only one that counts. Only actaul exchanges, when you walked into a bank/brokerage and traded US <-> Cdn dollars, can you use your actual cost, as shown on your transaction slip.

I wouldn't go overboard on this. You/CRA/IRS only care about LARGE single transactions of moneuy that was held over a large period of time (and thus large exchange rate gap).

But every time you buy/sell/receive dividend a stock or mutual fund, you should be recording its "native" value, and its value in the other currency (based only on official exchange rates). If you are making periodic buys/sells. etc, you can use a yearly figure, but again, it should be the official yearly one.

And be consistent.