Say an investor bought Canadian dollars for .65 on the dollar a while back, and recently converted them back to USD at 1.05, making himself a decent profit..
It’s fairly complicated.
My understanding is, if you do the buying and selling yourself (as an individual), 0.50 constitute capital gains and you have to pay taxes on them, either as short-term or as long-term, depending on how long you held Canadian dollars. In addition, you don’t have to pay tax if your gains from this transaction are less than $200. Finally, if you have a lot of short-term gains, under some circumstances you may elect to have your proceeds taxed under section 1256 (60% long-term / 40% short-term).
If you don’t buy and sell Canadian dollars yourself but rather hold them indirectly via a foreign currency ETF (FXC), consult the prospectus of your ETF. You may have to pay taxes because of transactions made by its managers “behind your back”, even if you don’t sell the ETF.
I am not a paid tax professional and this does not constitute professional advice.
