Vanderbilt Journal of Transnational Law

First Page



Exchange rate gain or loss may result from fluctuations of exchange rates or from formal governmental action such as revaluation and devaluation. In evaluating the significance of foreign exchange transactions and their tax consequences, the types of transactions that produce exchange rate gain or loss must be distinguished. The first type of transaction is currency speculation in which exchange rate gain or loss is the only profit or loss realized. The second type of transaction involves the purchase and sale of inventory in which the exchange rate gain or loss is ancillary to the monetary gain or loss realized on the underlying commercial transaction. The last type is credit transactions involving the borrowing and repayment of foreign currency, which may produce exchange rate gain or loss on the closing of the transaction with currency purchased at a higher or lower exchange rate than at the time the transaction originated.

The significant question raised by these foreign exchange transactions is the type of tax treatment to be accorded to the gains and losses realized. Do the gains or losses qualify for ordinary income or loss status or do they qualify for long or short term capital treatment? The answer to this question depends upon several factors including the type of foreign exchange transaction involved, the party's intent, and the status of the individual or corporation undertaking the transaction. The objective of this paper is to examine the tax consequences of foreign exchange transactions and the role played by the Corn Products doctrine in limiting long term capital gains treatment for such transactions.