Are fluctuations in the exchange rate of a foreign currency taxable for US expats converting such currency to another currency?
I understand that when I make a profit on foreign currency exchanges in excess of 0, I need to pay capital gains to the IRS.
However, it isn't entirely clear to me when I am considered to have completed such a transaction.
I am a US national and previously resided in Country A, where I kept a local savings account in currency A (from local wages paid to me in this currency). I have since moved to Country B. I want to transfer my savings from Country A in Currency A to Country B in Currency B. Neither currency is USD, and I didn't earn the money in USD. In such a case, will I owe capital gains tax on the difference between when I first acquired Currency A, and the rate its worth now against USD? Or since I am still not converting my savings to USD, do I not owe capital gains on it?
If I were to use some of my savings to purchase something abroad, would I then owe capital gains even though I have not involved USD (since the value of my savings in Currency A has appreciated against USD over the years)?
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A capital gain occurs when you buy something for and sell that thing for . In such a scenario you would have a capital gain of ; on which you would owe taxes.
You're describing a one way exchange.
If you are exchanging 100 Euros for 4 (or whatever) that's not a capital gain event.
If you exchange 1,000 Danish Krones for 130 Euros for 0 that's still not a capital gain event.
Exchanging 0 for 656 Danish Krones is not a gain of 556, that's just an exchange.
For a capital gain you need two transactions.
If exchange 0 for 130 Euros, then a few days later exchange the 130 Euros for 0 dollars, that's a capital gain of , which is taxable (assuming you're subject to US taxation obviously).
I've never heard of an expat getting nailed for this, but...
Technically the earlier response is incorrect. If you get paid in a foreign currency and it's worth, say US0 at the time, then ANY WAY in which you get rid of that currency you are technically supposed to consider that a "sale". If you acquire, say, British pounds worth US0, and then a month later spend EXACTLY that amount of British pounds, in pounds, in Britain, and it's currently worth US2, then you've made a profit that, in theory, is taxable. All by itself it wouldn't be, because it is under the 0 "vacation exception" that also applies to expats, but to the extent that this profit contributes to going over the 0 limit, then yes, it's taxable.
The important point is no actual "exchange" needs to be involved. Under the law, acquiring a foreign currency and getting rid of the foreign currency-- in ANY way you do so-- are two moments in time in which you are technically required to price the foreign currency in US$.
But I don't worry about it, because I've spent some time looking and still have never found a case in which an expat was nailed for this. And frankly, it's not realistic that we're going to follow the letter of the law here-- making note of the exchange rate every time we spend, e.g., 80 cents on a candy bar. But yeah, technically it's the law.
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