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More functional currency vs exchange rate

I?ve seen a number of (older) posts discussing functional currencies and exchange rate conversions. However, none seem to fully address my case...

I?m a US citizen, been living/working in West Africa 4 years-plus, with my payroll deposited in a European bank, in euros. In previous years, I regularly wired the money back to the States, but since the dollar began to slide I?ve kept virtually the entire 2008 salary in Europe. Don't know if it's relevant, but I typically only visit the States once a year... if that has any impact on the functional currency. According to most of the posts, the proper way to convert to dollars is to use the rate on the date of payment (monthly paydays). This year, however, there is a benefit to using the year-end rate. Assuming a salary of Euro20k/month and historical rates from Oanda, gross income is:

US$339k using the method: SUM(monthly_payroll x monthly_exchange_rate) US$325k using the method: dec31_exchange_rate x SUM(monthly_payroll)

If I didn?t actually convert the euros to dollars, is it appropriate to apply 31st December exchange rate to the entire annual salary? If not, can I show a loss at year-end due to currency fluctuation? In either case, what happens in subsequent years: Do I need to show loss/gain for currency fluctuations at year-end or when/if I convert to dollars?

Thanks in advance for the guidance.

Reply to
h8yurspam
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FYI, don't forget to take the foreign earned income exclusion and foreign tax credit, if they apply to you.

The IRS page at

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0524,00.html links to "Treasury Department's Currency Exchange Rate".

On that page, it says

Treasury Reporting Rates of Exchange as of December 31, 2008 SOUTH AFRICA - RAND 9.4660

The IRS page also refers to "Oanda.com".

On the page

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you can get theexchange rate for every day of the year. So I did USD to ZAR from 01/01/08 to 12/31/08.

On

12/31/2008 9.46490000

The average was

Average (366 days): 8.27506

So it looks like you can use the year-end exchange rate. Just say you were following the "Treasury Department's Currency Exchange Rate".

Also, the above is the interbank rate. When you really transfer money, you get a worse exchange rate. The typical cash rate on 12/31

12/31/2008 9.84349600

The IRS page also links to the "Federal Reserve Bank". And this page gives daily, monthly, and annual exchange rates. They have a link called weekly, but it appears to be the daily rates also.

For the monthly rate in December 2008 it says

SOUTH AFRICA RAND 9.9227

At oanda.com, I showed exchange rates from 12/01/08 to 12/31/08. The results are

12/31/2008 9.46490000 Average (31 days): 10.01004

The Federal Reserve's number for December is closer to the average, so maybe the Federal Reserve uses average rates, while the Treasury department uses the year-end rate.

And finally, the IRS page links to "U.S. Department of Agriculture". It appears to have monthly and annual exchange rates. However, when I click "Real Monthly Country Exchange Rates" it does not open the xls file. Maybe a bug in the website.

So I'm pretty confused. From the IRS page, it looks like you can pick which method you want.

Another fair exchange rate to use, at least to me, is the exchange rate the day you transferred money to the US. But what if you didn't transfer any money.

Reply to
removeps-groups

snip

when you receive, pay, or accrue the item." So how do you get the ability to use the end of year rate from that quote? The IRS site has it right, exchange rate on the date of the transaction.

Reply to
Drew Edmundson

That's why IRS will accept an average rate. I always use the average exchange rate published by the Federal Reserve in early January. Even the US embassy here in Bangkok provides the average shown on this report. This is an average for the entire year, not the end-of-year rate.

Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
Lanny Williams

With services like onanda and the online data from US Treasury people don't have to track the rate.

If there are only a few transactions, e.g. a stock trade, I use the actual rate. In this person's case it wouldn't be that difficult with there apparently being only 12 transactions. For corporate clients with thousands of transactions I use the average rate just like you do.

Regardless the original poster can't use the year-end rate.

Reply to
Drew Edmundson

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