Exchange Rates on a U.S. Tax Return — Rules for Expats

Exchange-rate rules for a U.S. tax return govern how a citizen or green-card holder abroad converts foreign-currency income, expenses, and balances into U.S. dollars. The U.S. return is prepared in dollars only; the IRS does not prescribe a single official rate but does prescribe which kind of rate applies to each item — and treats some currency movements as taxable events in themselves.

On this page

1. Which exchange rate does the IRS want me to use?
2. Which rate applies to the FBAR and Form 8938?
3. When does a currency movement become taxable?
4. Can currency movement create a U.S. gain on a local loss?
5. What records should I keep?
6. Frequently asked questions
7. Next step

Which exchange rate does the IRS want me to use?

Any published rate that is applied consistently — the IRS accepts rates from major financial sources, the Treasury, or the Federal Reserve. What matters is matching the right type of rate to each item:

• Regular income received throughout the year (salary, pension, rent): the yearly average rate is acceptable and is what most expats use.
• One-time transactions (sale of property or shares, a bonus, a large purchase): the spot rate on the transaction date.
• Foreign tax paid: generally the rate on the payment date, though accrued taxes may use the average rate for the year.
• Asset basis: the spot rate on the acquisition date — and that rate stays with the asset until you sell, which is where currency gains and losses come from.

Document the source and the rate for each conversion. Different items on the same return can legitimately use different rate types.

Which rate applies to the FBAR and Form 8938?

Both use the Treasury Reporting Rates of Exchange as of December 31 of the reporting year to convert the maximum account values. This is a specific published table, not your choice of source, and it differs from the rate you might use for income on the same return.

When does a currency movement become taxable?

Three common situations:

• Paying off a foreign-currency mortgage. If the dollar strengthened since you borrowed, you repay fewer dollars than the loan was worth when taken — a taxable gain under the foreign currency rules, even with no cash in hand. A loss on a personal mortgage is not deductible; on a business or rental loan it is.
• Holding foreign currency itself. Converting a large foreign cash balance back to dollars at a better rate than you acquired it produces a gain; small personal transactions are exempt below a per-transaction threshold.
• Selling a foreign asset. The gain is computed in dollars at purchase-date and sale-date rates, so currency movement is baked into the capital gain or loss.

Ordinary spending abroad — groceries, rent, travel — never creates a reportable currency gain.

Can currency movement create a U.S. gain on a local loss?

Yes. A property that fell 5% in local terms while the dollar weakened 15% shows a U.S. gain. The reverse also happens: a strong local gain can be a dollar loss. This is why expats should model a sale in dollars before assuming the local result carries over.

What records should I keep?

The rate used, its source, and the date for every converted figure; year-end Treasury rates for each FBAR year; and the acquisition-date rate for every asset you still own. Years later, the purchase-date rate for a home or a stock portfolio is the number nobody can find.

Frequently asked questions

Next step

Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If your return involves several currencies — or a property or mortgage where the dollar moved — our U.S. Tax Desk can set the rates and the records so the numbers hold up. See pricing or book a free fit call.