An American "tax person" living solely in Canada must report any interest income earned in Canada on his/her US tax return. But, does this income include any gains or losses caused purely by currency exchange rate changes?
For example, suppose that this US tax person bought a three year, 3%, $CD100,000 Canadian GIC on Jan 1, 2010. It would mature on Jan 1, 2013, and return $CD109,272.70. The issuing institution would produce a tax slip showing interest income of $CD9272.70.
But from the perspective of the IRS, because of the exchange rate on Jan 1, 2010, the initial investment represented only $US95,900.00. And because of the swing in the exchange rate, the pay out on Jan 1, 2013, would be the equivalent of $US111,098.55.
So would the IRS be looking for a declared income of $US15,198? Would it be interest, or capital gains, or some other category of income?