Currency Exchange Gain on Income Earned Abroad

"Kenneth Levin" wrote

You reported the income at the exchange rate for the year it was earned. That's one issue and it seems it was handled correctly.

A separate issue is the "investment" of any cash you hold in a foreign currency that may result in a gain or loss when you convert it to US currency, and yes, that will be subject to taxation.

...As a capital gain or loss. Your basis will be the original amount you converted when you left the U.S. plus the amounts you've reported as income (before FEI exclusion) since.

I can follow this at the theoretical level, but I am concerned a bit about how this might work out in practice.

Part of that is exactly when one might have "realized" a gain or loss on the foreign currency.

So suppose one were to move abroad and start earning money. Assume one is paid monthly. So on payday one computes the exchange rate and uses that for income tax purposes on the earned income. This seems quite straightforward. But at what point does one have to compute any gain or loss on the money. Presumably while living abroad one has normal monthly expenses for rent, food, movie tickets, etc.

One possible answer would be that you wait until you actually convert the remaining funds after personal expenses into US dollars before computing a gain or loss on the money. In effect, any money you spent while abroad is not considered as part of what would need to report for capital gain or loss purposes. This has the advantage of simplicity (of sorts, I guess you need to figure out which money you "spent" and which is then left over. I would imagine one would use FIFO. I can't imagine how one would try to do specific identification when paying a bar tab, for example.). But it would seem there would be some potential for abuse, in that there may be an incentive to purchase goods rather than convert the cash if any spent money went untaxed.

The alternative would be that every time one made a purchase, there would in principle be a need to convert the value to US dollars and determine a gain or loss on the sale. Now, barring a very volatile currency, it would seem that most of the time this would be a very minor amount, but I'm not aware of any official de-minimus value other than something that rounds to zero dollars. This would seem to be a bookkeeping nightmare and I would have a hard time imagining anyone actually keeping the records to the level of detail that this would require.

So is there any particular guidance on this, or is this something that is just generally ignored as being impractical to do anything about?

"Kenneth Levin" wrote

I then assume that if the exchange rate became less favorable, the loss would be a deductible capital loss.

Section 988 says that the income is ordinary. I don't know if that's the applicable section, but I'll at least quote it. The Description of Transactions part below makes no sense to me.

(a) General rule Notwithstanding any other provision of this chapter? (1) Treatment as ordinary income or loss (A) In general Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be). (B) Special rule for forward contracts, etc.

... ...

(B) Description of transactions For purposes of subparagraph (A), the following transactions are described in this subparagraph: (i) The acquisition of a debt instrument or becoming the obligor under a debt instrument. (ii) Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account. (iii) Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument.

But tedious. Each month you receive your paycheck there is a different exchange rate. Then there's also interest payments to track. Maybe you can use the average exchange rate for the entire year, but the original poster did live abroad for several years so there's still much work.

Yeah what I'm thinking is that if you just spend all that money (that's in a foreign bank account in a foreign currency) abroad then maybe it isn't taxable at all. It's logical at least. Suppose inflation is 0%. Say someone sells item X for 100 EUR. 10 years later that items still costs 100 EUR because inflation is 0%. But the USD/EUR exchange rate has changed from 1/1 to 1/1.5. So 10 years ago that item would have been exported to the US for $100, but now it is exported for $150. If you stay in Europe you can still buy the item with your 100 EUR. But if you come to the US and pay capital gain on your $50 income, you're left with 85% of $50 plus $100, or $142.50, and you can no longer afford the 100 EUR item. With in inflation of

3% I think the same reasoning holds.

Is it the case that foreign subsidiaries of US corporations are only taxed on the money they bring into the US? I heard Obama was trying to change this, but not sure what happened.

" snipped-for-privacy@yahoo.com" wrote in news: snipped-for-privacy@m27g2000prj.googlegroups.com:

I think it's now past statute of limitations, I did this in good faith, and the Feds didn't complain. Dad died in Holland, where I grew up, and sis and I inherited. House was sold and proceeds divided and put into bank accounts. I transferred money to US bank accounts at different times over a few years, and listed as long term capital gains the increased value of the euro between Dad's date of death and date of transfer.

Did I do wrong?

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Only if the transaction is a Section 988 transaction. There's no indication that it is.

So what is a section 988 transaction in plain English. I did not understand the part that I quoted.