I am a US citizen who has been residing and working in Cabo Verde, so have been primarily earning and spending escudos. I have money in checking accounts in both countries, each in the currency of that country. From time to time I've sent wires back to the US, exchanging my escudos for dollars. Over the years the exchange rate between dollars and escudos has changed.
My understanding from searching the internet and this site is that for currency exchanging, investment transactions cause gains or losses for IRS purposes, but non-investment transactions do not. What about the escudo balance in my checking account in Cabo Verde? Are the escudos that I held for months or years, before eventually deciding to change to dollars, considered an investment?
Since this is for the IRS, and to the IRS my functional currency is USD, I can't explain to myself how my actions are different from investing in escudos as a foreign currency. Is it based on my intentions? What if my intentions change over the years?
IRS Publication 54 mentions nothing about it. I think my situation would apply to many US expats, and that this document would be the place for the IRS to give us guidance. (On the other hand, I've gotten this sense that they think US citizens working overseas can be assumed to be working for US companies.)