In a discussion of Bitcoins, it was mentioned that taxes (in the US) are calculated in dollars. Given how volatile the exchange rate for bitcoins is, could a company time their tax payments to minimize their costs (or maximize their exchange, however you want to look at it)? If so, do any companies actually do this?*
I know the IRS assesses taxes using an exchange rate averaged for the tax year**, but it still seems like a company could use this to their advantage somehow. I don’t see anything wrong with this, since the IRS is still getting paid their fair share.
I know many companies use foreign registered shell companies to reduce their tax burden, but this question isn’t about that.
I’m not sure I understand the question, but at some point, wouldn’t this involve predicting exchange rates - and if so, if someone could do this, wouldn’t they make a whole shitload more money just playing the forex markets?
I was under the impression that the IRS taxed foreign-currency transactions based on market exchange rates at the time the transaction took place. So if I sold a 50 USD basis widget for 1000 Ruritanian Gelgameks in August when the market was hovering around 1 USD = 10 RUG, but by the time I got around to filing my taxes the Gelgamek had fell to 1 USD = 50 RUG, I couldn’t say to the IRS, “well, I only got 1000 RUG for that and now it’s worth only $20, I sold that widget for a loss I tell ya, tax writeoff man!”
This is one of the reasons why I’m so skeptical of those “trading system” ads. If I found a way to reliably and safely make 30% a year trading stocks, currency, and whatever, do you really think I would be spending time offering DVDs of my system for $39.95 to my competitors (i.e. you)? No, I’d be trading my system! The fewer people who know about it the more money I can make off it.
And yet there seems to be a lot of respect for what is known as technical analysis on Wall Street. I still consider it something akin to voodoo but it’s not beyond imagining that you can find prescient patterns without necessarily having to understand how or why those patterns are predictive.
The problem is, as you say, if enough people become aware of a particular pattern or correlation then it not only becomes worthless but it can also become self-fulfilling.
I’d imagine you’d need to be a pretty devoted student of Chinese/US/Eurozone/etc. politics in order to have a shot at really playing and winning in the currency markets. I’m sure computer models can predict some stuff…but not the minds of the heads of China, for instance. Not yet, anyway. Just my WAG.
It seems to me that if a company could consistently arbitrage currency advantageously for purposes of minimizing its taxes, it ought to just go into the business of arbitraging currency.
It’s not taxed using the exchange rate at the time of the sale. It’s tax based on the exchange rate at the time of repatriation. In fact one of the big problems (or not depending on your point of view) nowadays is many companies are not repatriating their profits at all so they are escaping taxation.
Although if you invest in ADR’s (American Depository Receipts), you DO pay taxes on the profits (dividends, cap. gains) of those companies as I can personally attest.
One problem with deciding whether or not technical (or in fact fundamental) analysis is any good, is that about as good as it could be is almost indistinguishable from chance. A typical fee for money managing is around 1% (excluding hedge funds). Since it’s apparently a rare skill, money managers are presumably taking most of economic rents of their skill. But let’s assume they split it equally with their clients, so they can outperform by 2%.
How many coin flips do I have to call before you will be convinced I can do that better than chance? The standard deviation of the percentage of heads in N tosses is 0.5/sqrt(N). If you want to be able to confirm at 5% significance (1.96 standard deviations) level that someone is 2% better than average, you need 2400 calls.
That’s a heck of a lot of calls. Furthermore, the guys who are lucky in the beginning (as well as those who are good and not too unlucky) are going to stay in the business, so if you look back at those money managers still operating as such who have a large number of calls, you know you probably have a biased lucky sample.
The whole idea of ADRs is that they are US based securities. You’re actually trading depository receipts which give you ownership of foreign securities held on deposit. Dividends are passed through to you (with probably a small rake off I’m not sure) and you owe tax on that. You owe tax on any capital gain when you sell the ADR. If for some reason the foreign stock price went up and the ADR did not, you’d not owe any tax. (This would never happen in any meaningful way as if the ADR price got out of line with the foreign stock price, someone would buy the ADR, take the stock out of deposit, and sell it on the foreign market).
But even if you traded directly in foreign securities, you, as a citizen I assume, are taxed on your worldwide income. I guess you might be able to form a holding company which buys foreign stocks as assets and then doesn’t repatriate anything to you until much later deferring your tax just like a corporation does. I doubt that wold be worth the expense for most people.
Thanks. I DO know what an ADR is. My comment was only designed to help people understand that they are a different animal as compared to the foreign profits of American companies.
I hypothesize that the IRS treats Bitcoins as an asset, not a currency. Seen in that light, the comparison might be to commodity markets, not Forex.
For elaboration on your asterisk, see wiki’s discussion on transfer pricing. There is all manner of tax dodges that big companies can with foreign subsidiaries. Transfer pricing - Wikipedia
