I'm a US taxpayer living in the UK with a home mortgage denominated in Pounds Sterling. Due to the recent drop in the Pound, I have a significant taxable gain in the mortgage. I don't want to payoff my mortgage since the interest rate is fixed for another couple of years and is quite low. When the fixed period ends, I'll likely need to refinance the mortgage at which time I would need to recognize the FX gain or loss on the mortgage for US tax purposes.
I'd like to lock in the FX gain by doing an FX forward contract. I know any FX gain on the mortgage when I refinance will be treated as ordinary income and any FX loss would be a personal loss. But how will the gain/loss on the FX forward contract be treated from a US tax perspective? Will that gain/loss only be recognized when I close the forward contract? How is the gain/loss from the forward contract treated for US tax purposes?
