Currency ETF Gain or Loss and IRC Sec. 988

The above does not sounds right to me. I think you have a capital gain or loss, and it is long-term if the position is long and held for more than one year. The buy price uses the USD/EUR exchange rate on the date you bought the shares, and the proceeds uses the exchange rate on the date you sold the shares.

When you buy currency contracts in currency trading accounts, then I think form 6781 applies, but am not sure. This form says all gains and losses are capital gains, but 60% is considered long-term or short- term, don't remember which.

I think if you bought euros in a bank account, kept them there, and then brought the euros back to the US, that's when section 988 would apply.

Why would a loss be treated as investment expense? What kind of loss are you talking about here? Capital loss, short interest, etc?

(All of TomYoung's original post deleted in an attempt to not have this message bounce due to excessive quoting.)

This ETF is a Grantor Trust and actually holds Euros in interest earning accounts.

"TAXATION OF THE TRUST The Trust is classified as a ?grantor trust? for U.S. federal income tax purposes. As a result, the Trust itself is not subject to U.S. federal income tax. Instead, the Trust?s income and expenses ?flow through? to the Shareholders. The Trust?s income, gains, losses and deductions will be reported to the Internal Revenue Service on that basis. TAXATION OF U.S. SHAREHOLDERS Shareholders generally will be treated, for U.S. federal income tax purposes, as if they directly owned a pro-rata share of the assets held in the Trust. Shareholders also will be treated as if they directly received their respective pro-rata shares of the Trust?s income, if any, and as if they directly incurred their respective pro-rata shares of the Trust?s expenses."

Given this, a shareholder is considered to actually own Euros when he purchases the shares of the ETF and to make an exchange of Euros for US Dollars when selling shares of the ETF, and that's why Sec. 988 applies.

The loss on sale of shares is considered to be a loss on the conversion of Euros to US Dollars so Sec. 988 requires "any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be)."

The question, then, is it correct to record the loss as a form of negative interest on Schedule B, or is there a more appropriate place in the tax return to record this? (I ended up recording it as investment interest expense on Schedule A via Form 4952 "Investment Interest Expense Worksheet.")

Tom Young