Query by John Q: Are unrealized foreign trade gains and losses taxable?
For instance, a corporation borrows funds denominated in a foreign currency during the year. As of yr conclude, the foreign currency has diminished in appeal towards the US dollar, therefore for accounting purposes the mortgage is modified to its US dollar equivalent and an unrealized foreign trade gain is recorded. Would this acquire be taxable or is it only taxable when realized (i.e. when the loan is compensated)?
I am asking especially for the United States federal tax rules. I am familiar with the Canadian tax rules for foreign exchange but can not uncover any info on the US guidelines.
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Remedy by Pie, Mash & Liqour
I cannot communicate a hundred% for the US but in most tax jurisdictions in the globe tax is only ‘payable’ on realised gains. Even so you would typically carry ahead a deferred tax liabilty or asset for unrealised gains/losses.
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July 12th, 2011 at 6:01 am
Good question. You probably have seen this:
“Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income.”
http://www.irs.gov/businesses/small/article/0,,id=130524,00.html
Periodic payments or accrual of interest under the loan may generate foreign currency gain or loss under § 988. The gain(loss) is partially realized each time a payment against the loan is made or an accrual recorded. Makes for a delightfully complicated calculation.
The accounting adjustment you describe for unrealized fx gain does not sound like an accrual per se UNLESS your accounting also books accrued loan interest and uses it as an expense for tax accounting purposes. In this case, the accrued loan interest is booked in US Dollars, with the appropriate currency conversion. The foreign currency income(loss) is thus built into this entry.
Hope this helps.