Currency Exchange -- Tax Free or not?

Pianist said: "For currency exchanging. Is this taxable? If it is.... well that's just wrong. Thanks!"

Grifter said: "I believe ur profits get taxed."

Pianist said: "Well, what is the difference between exchanging your money from one currency to another and back to actually making this a money making machine? Currency exchange happens all the time and I can not imagine them taxing this. Anyone else know exactly what the deal is? I understand this is how George Soros made much of his money."

crankitdb711 said: "Profits are profits and profits get taxed. The IRS doesn't care how you get these profits. Yes, it is taxable."

trickynick said: "[QUOTE=Pianist]Well, what is the difference between exchanging your money from one currency to another and back to actually making this a money making machine?[/QUOTE] If I understand your point correctly, you are arguing that you can claim your exchange of one currency to another is not profit-seeking activity. It would be as if you went to Canada for the weekend, used the ATM to make a withdrawal from your US-based bank account and exchanged the cash back to US dollars when you came home and nobody's the wiser, right? Here is where that reasoning falls apart: In order to make any kind of interesting profit from the trading of currencies it is absolutely necessary to use [i]leverage[/i]. Think about it, are you really going to chase the possibility of a 0.0025 change in the relative value of two currencies with no leverage at all? No way, it is a waste of time. Because of this absolutely essential requirement of using leverage to make this worth your while, it involves setting up margin accounts with FOREX brokers or some sort of more complicated setup involving simultaneous loans from foreign and domestic banks. If the government sees you doing these things, do you think they are going assume you are doing it as a way to more conveniently access your money during your vacation in Switzerland? Of course not, they're not idiots. You are doing it to MAKE MONEY, that is the ONLY REASON TO DO IT. Yes, a lot of travellers and people buying goods from other countries change currencies for those purposes but they do not typically exchange it back for a realized gain and what they do exchange back is usually of such a small and immaterial amount that the Government is not going to investigate it. The behavior I described above is clearly a capital gains motivated activity. See the difference? [QUOTE=Pianist]Currency exchange happens all the time and I can not imagine them taxing this.[/quote] Yes, currency exchange does happen all the time. Over $2 trillion (that number is largely magnified by the amount of leverage involved) in volume traded every day making it the most deeply liquid market in the world, and most of that volume is people intending to MAKE MONEY. Can't imagine the government would want to tax people trying to make money? You should use your imagination more often. :) [QUOTE=Pianist]Anyone else know exactly what the deal is? I understand this is how George Soros made much of his money.[/QUOTE] George Soros is a hedge fund manager. Hedge funds are typically set up as limited partnerships, which means that all partners are liable for taxes paid on the partnership's [i]realized[/i] gains (gains from positions closed during the relevant time frame). Which means that if you were an investor in the quantum fund while Soros shorted the pound back in 1992, even if you didn't withdraw any money from the fund, you'd still be on the hook for taxes on the gains from that trade."

Darren said: "There are very few truly "tax-free" transactions of any sort."