What is the taxation of foreign exchange gains?
Taxation of foreign exchange gains depends on a few factors including the purpose of the transaction and the country the taxpayer resides in. In Washington, foreign exchange gains are taxed as capital gains if the taxpayer is an individual or estate. The gains are taxed at regular capital gains rates, which range from 0% up to 20% for net long-term gains. Net short-term gains are taxed at ordinary income rates, which range from 10% to 37%. Businesses may also be subject to taxation on foreign exchange gains, depending on the context. Gains from trading foreign currency may be taxed as ordinary income, while profits from foreign currency transactions, leverage contracts, and futures trading will all be taxed as capital gains. In addition, the new Tax Cuts and Jobs Act (TCJA) introduced a new way to tax foreign exchange gains. The “Foreign Derivatives Income” provisions of the TCJA allows taxpayers to choose to have their foreign exchange gains taxed at a lower rate of up to 23.8%, as long as they and their transactions meet certain criteria. Overall, taxation of foreign exchange gains depends on the purpose of the transaction and the taxpayer’s residency. It is important to consult a tax professional to determine your specific tax liability and if the Foreign Derivatives Income provisions may apply to your situation.
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