One of the easiest ways for investors to gain international investment exposure is through mutual funds and ETFs. Determining cost basis for reporting and tax purposes can be tricky. Rules for determining cost bases are different in each country. Then currency fluctuations can change cost basis entirely.
Technology may once again be to the rescue. Programs
are being created which automatically note each country’s cost basis rules. These programs can determine the cost basis of various investments based on those rules, then take into account the possibly change in currency valuation. This diffuses the current accounting nightmare and lowers costs, enabling investors to tap into higher returning foreign markets.
Funds may have their own systems for calculating cost basis and may allow individual broker-dealers to use their own brands. A broker-dealer accesses the system through a website, then can choose its own ETN (electronic trading network) to execute the trade. The trade is paid for in local currency, and is settled through the clearing firm. Trades profits and losses are reported to the IRS every six months.
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