As a US taxpayer, if I hold some foreign currency that gains or loses value, what are the tax consequences when I exchange the currency for US dollars or other goods or services?
Let's take a concrete hypothetical example. Suppose in January the exchange rate of pesos to dollars is 10 pesos to the dollar. I take US$500 and exchange it for 5000 pesos.
Suppose in May, the peso has strengthened and the exchange rate is now 8 pesos to the dollar. If I exchange my 5000 pesos for US$625 at this rate, is my $125 profit taxable? How do I report it?
Suppose that instead of exchanging my pesos for dollars, I use them to buy some goods or services. Say I spend my 5000 pesos on a crate of fine tequila for which the fair market value is US$625. Do I have a taxable gain, and how do I report it?
Suppose instead that the peso weakened and in May the exchange rate was 15 pesos to the dollar. If I exchange my 5000 pesos for US$333, or goods or services to that value, can I deduct my loss of $166? How do I report it?
Does the taxability depend on the dollar amounts in question? If so, what are the limits?
If it makes a difference, assume that I held physical currency (rather than a bank account or similar asset), and that I am not in the business of currency trading.
This is somewhat similar to When and how should I pay taxes on ForEx trades?, but that question is specific to Israeli tax law instead of US, and also does not consider the case of exchanging for goods and services.