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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?

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So would the IRS be looking for a declared income of $US15,198?

Yes.

Would it be interest, or capital gains, or some other category of income?

Capital gains. This is akin to bonds paying dividends - once you sell the bond the difference between the cost basis and the sale price, in USD, is your capital gain.

Here's a nice summary. Since the US thinks its the only country in the world, you're considered "acquiring" CAD when you earn them.

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