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As I understand it, currency appreciation is treated as taxable income. However, if the currency you've converted to or any other currency you convert to isn't really appreciating at all and instead it's really just the US dollar significantly depreciating in value due to high inflation, then are you still going to be taxed? (rhetorical question).

If so, then how do you protect your savings against depreciation from inflation without paying taxes on it? So basically when more money is printed, then you either 1) do nothing and have your money become devalued or 2) you can try to shelter it but then you'll pay taxes trying to keep it at the same value no matter what avenue you go down even if its just a conversion to another currency.

It seems like a no win situation unless maybe you just leave it in that other currency and purchase goods and services directly with the other currency. Or is that also taxable too? Is there any way to protect and shelter your savings?

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  • Long-term buy-and-hold investments can match or beat inflation but not linearly, then not obviously, and then not confidently. But there is no tax. Short term investments beat inflation if they are profitable or not even match inflation if they are not profitable. Short term investments are trading. As a hedged commodity trader I just try to be profitable.
    – S Spring
    Nov 15, 2021 at 6:53
  • To hedge long-term corporate bonds against the effects of inflation then take a short-position in a long-term Treasury Note or Bond. To hedge mid-term corporate bonds then take a short-position in a mid-term Treasury Note. To hedge short-term corporate bonds, or even cash, then take a short-position in a two-year Treasury Note. Oh, short-position in a Treasury is the same thing as a long-position in a Treasury rate.
    – S Spring
    Nov 15, 2021 at 22:19

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Capital gains are calculated in nominal US dollars. While there have been proposals to change this and use an inflation-adjusted purchase price for calculating gains, they have not been adopted. Thus, capital gains taxes do not obey the concept of neutrality of money. Real after-tax returns are affected by inflation even if real pre-tax returns are not.

However, capital gains taxes do not apply to tax-advantaged accounts like a 401k or IRA.

And even in taxable accounts, a long holding period without portfolio turnover reduces the importance of capital gains taxes (as distinct from taxes on dividends and interest). If high inflation over an extended period leads to compounded nominal price returns that are very high (e.g., 1000x), so that the basis (purchase price) becomes negligible, then capital gains taxes take a one-time "bite" upon eventual liquidation that is, at worst, the tax rate (say 15%) times the ending investment value. Thus, the after-tax return still maintains most of the inflation hedge (e.g., 850x versus 1000x).

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You mention taxes but I think low risk investments are more important. You'll need to get back to dollars eventually so don't let the tax tail wag the risk dog! An investment that isn't taxable doesn't help you if you lose 20% (which could happen with foreign currency).

Bonds, TIPS, or CDs are good low risk investments.

Some bonds have tax benefits as well.

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