U.S. Taxation of Currency
Gains or Losses 

By Vernon K. Jacobs, CPA 
& J. Richard Duke, J.D., LLM
Ofshore Tax Strategies

Tax Rules For International Investing - Foreign Currencies

The general rule with regard to the U.S. tax treatment of gains or losses from exchanging U.S. currency for non U.S. currency (and back) is that the gain or loss on the currency exchange will now be taxed the same as the underlying transaction. The Taxpayer's Relief Act of 1997 included a provision [Act Section 1104(a)] that included some changes, which are included in the following explanation.

Where there are currency gains or losses in connection with a trade or business or with the management or administration of investment assets, the gain is treated as an ordinary gain (rather than as a capital gain) and any loss is generally treated as an expense.

Where currency gains or losses are incurred in connection with the purchase of an investment, the gain or loss on the currency change on realization (usually from selling) is a capital gain or loss and is included as part of the total capital gain or loss on the investment. 

Currency gains of $200 or less that arise from personal transactions (not for investment or business) are not taxable, but any personal currency losses are not deductible. A personal transaction includes any gain or loss arising from travel even if the travel is business related. Any currency gains in excess of $200 per transaction (per trip or per purchase) are treated as a capital gain. Losses on currency exchanges for business travel also appear to be non-deductible.

The primary source of information on the tax treatment of currency gains or losses is IRC Section 988.

The preceding comments are a very brief and non-technical summary of the key tax rules that apply to a person who is a citizen of another country and is not a permanent resident of the U.S. This information is an excerpt from Offshore Tax Strategies, by Vernon Jacobs and Richard Duke.
  About the authors:

Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests.   J. Richard Duke, JD, LLM is an attorney who specializes in international tax law and is an Adjunct Professor of international tax law.

Sponsored by Offshore Press, Inc. Copyright, 2006, All rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. (913) 362-9667. Email to Offshore Press  Vernon K. Jacobs, Webauthor