Tax advices on foreign exchange affect.

[edsmithedsmith]

Tax advice on foreign exchange affect.

I am a US citizen with permanent residence in Canada. I work for the Canadian sub of a US firm. The firm provides a typical stock purchase program which I took advantage of. The company was acquired for cash in 2008 so all stock holders received a check for the value of their stock and I am confused as to how to report the gain for US taxes.

Using 1 share as example. At the time of the purchase, the purchase price in US$ was approx $12, but the Cdn $ was worth only US$0.63 therefore my company deducted approx Cdn$19 from my pay to purchase this share.

The acquiring company paid US$25.00 for each share. At the time of the sales the Cdn$1.00 had strengthened against the US$ and was worth approx US$0.96. So in Cdn$ I received approx $26.

In reporting capital gain on my US taxes the instructions state one must use the actual FX at the time of the transactions making my cost basis US$12 - my proceed US$25 equivalent to a US$13 gain. However due to the strengthening of the Cdn $ against the US$ my actual gain is Cdn$7 (Cdn$26-Cdn$19).

How do I account for the FX affect? I assume the IRS is reasonable and would not expect me to pay tax on a $13 gain when my actual gain in my Canadian currency is $7?

 

[LdiJ]

I am a US citizen with permanent residence in Canada. I work for the Canadian sub of a US firm. The firm provides a typical stock purchase program which I took advantage of. The company was acquired for cash in 2008 so all stock holders received a check for the value of their stock and I am confused as to how to report the gain for US taxes.

Using 1 share as example. At the time of the purchase, the purchase price in US$ was approx $12, but the Cdn $ was worth only US$0.63 therefore my company deducted approx Cdn$19 from my pay to purchase this share.

The acquiring company paid US$25.00 for each share. At the time of the sales the Cdn$1.00 had strengthened against the US$ and was worth approx US$0.96. So in Cdn$ I received approx $26.

In reporting capital gain on my US taxes the instructions state one must use the actual FX at the time of the transactions making my cost basis US$12 - my proceed US$25 equivalent to a US$13 gain. However due to the strengthening of the Cdn $ against the US$ my actual gain is Cdn$7 (Cdn$26-Cdn$19).

How do I account for the FX affect? I assume the IRS is reasonable and would not expect me to pay tax on a $13 gain when my actual gain in my Canadian currency is $7?

Sorry, but you are expected to handle the gain in US dollars. You paid 12.00 US to purchase the shares and received 25.00 US when you sold the shares. Had the exchange rates gone the other direction and you had a higher Canadian gain than US gain, you would still be reporting in US dollars.

 

[edsmithedsmith]

Thanks - unfortunately this sounds like I will end up paying over a 60% tax rate on my actual gain in my Cdn currency. This does not seem right - can I off set this by claiming a loss on my foreign exchange due to the fact that I had to buy US currency at a 1.58 FX rate to purchase the stock then buy back Canadian currency at a .96 FX when the stock was sold?

 

[LdiJ]

Thanks - unfortunately this sounds like I will end up paying over a 60% tax rate on my actual gain in my Cdn currency. This does not seem right - can I off set this by claiming a loss on my foreign exchange due to the fact that I had to buy US currency at a 1.58 FX rate to purchase the stock then buy back Canadian currency at a .96 FX when the stock was sold?

Your gain is 13 dollars US. Your capital gains tax on 13.00 would be 1.95 per share (15%). That hardly results in a 60% tax rate, even against your 7.00 canadian gain. Allowing for the current exchange rate, it might be about 30%.. However, since you also get credit for foreign taxes paid, if you do your return properly, using your world wide income, then the canadian tax you pay could reduce or eliminate any US tax due.

 

[edsmithedsmith]

I understand - thanks for your help