Reporting gain or loss on currency exchange rates

Jan 18, 2009 3 Replies

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Bob Brown 17 years ago

I have some exchange rate gains and losses from two types of thing:

a) Everbank offers WorldCurrency CDs with are FDIC insured CDs with a US bank but demonitated in foreign currencies. They report interest each year on 1099-INT and interest is reinvested in the same currency as is the principal at maturity. When the CD maturity proceeds are withdrawn, the payout is in dollars so there is a gain or loss based on how exchange rates have moved.

b) One of my brokers (Interactive Brokers.com), allows purchase of a foreign stock even though the account doesn't hold that currency. If you don't want to be short the currency, you then buy the necessary amount, but it's not required. Similarly, if you sell a foreign stock then that foreign currency sits as cash (earning interest) in the brokerage account until it is sold (converted back to dollars). In either case, if the currency buy or sell isn't contemperanious with the stock transaction, there's a gain or loss on the currency position itself.

Since these are for my individual investments (not part of a business), I assume these both are capital transactions and reported on Schedule D, either short or long term based on holding period. Do people agree with that? As far as labelling it, would I just say so many Euros with a purchase date of "various"?

Thanks for any suggestions here.

Bob Brown

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removeps-groups 17 years ago

Interest has to be reported on Schedule B.

As for exchange rates, I'm not sure if there is a standardized rule. I use either

(a) the average exchange rate on the day the interest/dividend was received, or the stock was bought (for the cost basis) or sold (for the proceeds) (b) the average exchange rate for the year of the day the interest/ dividend was received, or the stock was bought (for the cost basis) or sold (for the proceeds)

Obviously, method (a) is much more tedious as you have a different exchange rate for every day of the year, whereas method (b) has the same exchange rate for each day of the year, but a different rate for different years. But methods (a) and (b) yield different results, so I wonder if you have to use one method.

You can see exchange rate conversions at

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Finally, don't forget to use the Typical Cash Rate, which is the interbank rate + 4%. This will usually result in less US income (ie. less interest, less dividends, but maybe more capital gains). I did an amended return changing from the interbank rate (in my original return) to the typical cash rate (in the original return), which resulted in me getting money back.

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jmail7 17 years ago

No, I disagree. Currency exchange gains and losses are generally treated as ordinary income or loss under section 988. While there is an exception to section 988 for personal transactions, the transactions you describe would be considered investment transactions and would be ordinary. The income/loss related to the currency transactions should be reported on line 21 of Form 1040.

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Bob Brown 17 years ago

So if it's a net loss I report a negative amount on line 21?

Thanks for the input

Bob Brown

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