When calculating the gain/loss of a foreign sale, I'm wondering whether I have to make the calculations in the foreign currency and then convert the gain/loss in USD or I have to convert each transaction to USD when they happen and then make the calculations?
For example:
Let' say:
1) I buy 10 shares of stock A on 2010-01-01 (exchange rate: 1.43)
Cost basis €: 300€
Cost basis $: $429
2) on 2013-01-01, there is a return of capital of 2€ per share (exchange rate: 1.32)
Cost basis €: 300 - 10*2 = 280€
Cost basis $: 429 - 10*2*1.32 = $402
3) finally on 2015-12-01, I sell them all for 400€. (exchange rate 1.05)
Gain €: 400 - 280= +120€ => +$126
Gain $: 400*1.05 - 402 = +$18
You are supposed to translate at the transaction date:
"Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income. You can generally get exchange rates from banks and U.S. Embassies."
Tom Young
You are supposed to translate at the transaction date:
"Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income. You can generally get exchange rates from banks and U.S. Embassies."
Tom Young
Ok so when they say "all items of income, etc.", it applies to the steps of calculating the cost basis / gain-loss of a sale so I have to convert to USD at each step and not at the end, correct?
Thanks
Not quite there. There are actually two exchange rates for each day. One is the interbank rate (which banks charge each other); the other is the "cash" rate which includes the commission a bank will charge a retail customer for converting from one currency to the other. IRS states to use the rate that is most appropriate so long as it is consistently used throughout your tax return. That's about as clear as mud.