Are fluctuations in the exchange rate of a foreign currency taxable for US expats converting such currency to another currency?

Question

I understand that when I make a profit on foreign currency exchanges in excess of $200, 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)?

Answer 1

A capital gain occurs when you buy something for $10 and sell that thing for $11. In such a scenario you would have a capital gain of $1; on which you would owe taxes.

You're describing a one way exchange.

• If you are exchanging 100 Euros for $114 (or whatever) that's not a capital gain event.

• If you exchange 1,000 Danish Krones for 130 Euros for $150 that's still not a capital gain event.

• Exchanging $100 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 $150 for 130 Euros, then a few days later exchange the 130 Euros for $200 dollars, that's a capital gain of $50, which is taxable (assuming you're subject to US taxation obviously).

Answer 2

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 US$100 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 US$100, and then a month later spend EXACTLY that amount of British pounds, in pounds, in Britain, and it's currently worth US$102, then you've made a $2 profit that, in theory, is taxable. All by itself it wouldn't be, because it is under the $200 "vacation exception" that also applies to expats, but to the extent that this $2 profit contributes to going over the $200 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.