@ac203 the argument that you are making, while logical , I do not believe will sway the IRS i.e. they will not give credence that your INR purchase was purely and ONLY for investing in these shares. However, they will not argue if you were to show that you used $100 to buy shares of an Indian entity ( at that time say INR was INR 65 per USD ). After a year holding the investment you sold the whole lot for INR 10,000 thus giving you a gain of Rs. 3500 --- 10,000 less basis of 6500. Assume you that there was no Indian tax on this . When you sold your investment the USD was at Rs. 75 per USD . This would mean that for US tax purposes the roundtrip shows you a profit of 10,000 / 75 less $100 i.e. $133 - $100 = $33. The effects of the loss in currency devaluation is included in the computation of the gain ( using US$ as the standard / basis here ). This is true even if you left the monies in India and in INR. However, later when you repatriate the US $ back the loss at that time is personal loss and not deductible, the gain will be .
Generally the rule is ALL income is taxable , unless specifically excluded by law and all deductions/losses are disallowed unless specifically allowed by law. It is not a bilateral world but thems the rules based on Congresses' laws enacted.
Hope this answers your querey
Namaste ji
