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Say I live and work in the United States, but mostly do contract work for European organizations. This would mean that I very often invoice and get paid in EUR, which initially might go into a EUR bank account (or a multi-currency account with a EUR "bucket"), before eventually being converted to USD and sent to my main American USD bank account.

When filing my US taxes on this income I need to know the specific annual value of this EUR income as USD, so what is the appropriate way to calculate the USD value?

Also, while I can look at the exchange rates and value of some of the money that was converted from EUR->USD during the year, what happens if some of that work income was not exchanged/converted to USD within the tax year? In other words, how can I calculate the appropriate USD value of EUR income that was never actually converted to USD during the tax year?

Any other recommendations? Is there anything I need to know about getting paid in foreign currency as an American? (I'm trying my best to do the math correctly, but I'm finding it very daunting and confusing dealing with foreign-currency income.)

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You convert the income into USD based on the Treasury's rate for the date on which you received the income (See the IRC Sec 989(b)(1)). The Treasury's rate is accepted unconditionally, if you use another source of spot rate - the IRS may challenge your selection. In any case be consistent - once you chose which source of rates you're using you should use it consistently all the time.

Whether you actually converted or not - doesn't matter for the recognition of income, neither does the actual rate at which you converted (unless that's the rate source you chose for your spot rate). It does matter however if there's a difference between an actual conversion amounts later and the recognized income. You might need to talk to a EA/CPA on how to deal with currency fluctuations and related gains/losses (See the IRC Sec 988).

Alternatively you can create a business with EUR as operational currency (See the IRC Sec 985), but I'd suggest working with a CPA on how to properly set that up and manage.

This article provides a nice writeup of all the complexities involved. It talks about operational currencies, QBUs, IRC Sec. 985, 987, 988, 989, foreign tax credits, and other relevant topics.

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  • Can you explain a bit more about why the Treasury's rate is the right one to use for tax purposes? Maybe a reference from the IRS or similar. From the link I see this comment which makes it seem like this isn't the right way to value foreign currency. "Since the exchange rates in this report are not current rates of exchange, they should not be used to value transactions affecting dollar appropriations."
    – stoj
    Apr 4 at 15:29
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    @stoj this is the rate accepted by the IRS without question. You may use others, but the IRS may object and challenge the values if that's what you're doing. In any case, you should use one source of rates for all the values on your return, you can't pick and choose depending on dates or amounts.
    – littleadv
    Apr 4 at 16:11
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    This is the equivalent of bringing it in to USD on the day, and then immediately buying EUR again after. Basically use the official rate on the day it was received.
    – stanri
    Apr 4 at 17:51
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    @Fattie not sure where you see the contradiction. What hour may not matter, but what day it does because the law requires timely payment (at least on quarterly basis). The recognition of income in the US is at the time of the taxable event, not at the end of the year, as such the currency conversion should happen then to fix the $ value.
    – littleadv
    Apr 4 at 19:58
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    @Fattie as to your second example: currency exchange gain or loss is included in ordinary income, but reported as a separate transaction.
    – littleadv
    Apr 4 at 19:59

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