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Level 1

Capital Gains on the Exchange of a Foreign Currency

I'm curious how to view/record my capital gains/losses on the exchange of a foreign currency for US Dollars.


I have a Canadian Dollar asset account which receives payments in CAD from customers. Say I hold the CAD for 1 year and the exchange rate goes up substantially. Then I exchange the CAD for USD by transferring them to my USD account.


How can I view the capital gains earned from the difference of when I receive the foreign currency until I sold it?

I was hoping the "Realized Exchange Gains & Losses" report would show this, but it seems to only look at gains between the rate when an invoice is created until the payment is received.

 

Would I be better off manually creating a Journal Entry that records this gain? What would a Journal Entry for that look like?

 

Thank you!

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Community Champion

Capital Gains on the Exchange of a Foreign Currency

I refer you to 2016 update from the IRS regarding treatment of exchange on "non-functional" currency which for your purposes would be 100% ordinary gain no matter how long you keep the CAD in an account or under your mattress. Of course there was a new tax law last December which may or may not affect ordinary income treatment of gain on exchange but for what it's worth here is what was certainly in effect a year ago.

https://www.irs.gov/pub/int_practice_units/fcu_cu_c_18_2_1_04.pdf

 

On the date you transfer money from your CAD account to your USD account you will move the base dollar amount and post the difference as ordinary income Gain on Foreign Currency Exchange.

 

One thing to watch, if you sold to your customers in USD but they paid in CAD you have an original ordinary gain/loss on the date the CAD dollars hit your Toronto Dominion (or other Canadian bank) account. Additional gain/loss will be reflected from this adjusted basis. What I mean here is that $10,000 in CAD in the bank may already have had $1,000 of it treated as gain or loss and the conversion today may be for $9000 or $11000, not the $10,000 actually moved

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