In large part, it comes down to the intent of the individual. If he could demonstrate that he held the funds overseas as an investment, with the believe that it would appreciate in value because of currency fluctuations, then he would have a valid argument that he owned a traditional investment and lost money when he disposed of it. If this is true, then one would think a loss deduction would be allowable.
Since it involves nonfunctional currency, then code 988 would apply, that is why I believe it would be an ordinary loss.
If he simply held it in a bank account without regard to the gain or loss on currency fluctuations, then it would be a personal asset and the gain would not be deductible. So, to sustain an audit on the issue, he would need to be able to demonstrate a traditional investment motive for keeping the funds in the foreign bank.
So, @ay66026 has a valid point when he mentions that a CD can function as a traditional investment, complete with gains or losses on disposition.
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