I was wondering if any of you guys could shed some light on a scenario I have. An interest earning savings account overseas. This account is not a mutual or stock fund. Interest earned is automatically reinvested. There are some occasional deposits into this account through the year. Unfortunately from year to year the local currency fluctuates in relation to the US dollar. On average the balance in US dollars tends to go down. I am wondering how to account for the currency devaluation or even appreciation when that happens. Will that be on a year-to-year basis? Any thoughts or suggestions will be greatly appreciated.
To answer this with a short answer, there is no taxable provision that will allow for currency appreciation or devaluation. There are no adjustments that you can make to account for the change. So if you paid $500 and received an equivalent of $2500 for the currency, your ordinary gain is $2000. If the currency appreciates to $4000, your ordinary gain is $3500.
If your currency loses value and is only worth $1500, then your ordinary gain is $1000.
Thank you for jumping into the discussion. Unfortunately, I am a bit confused by your answer. The second example is what threw me off. You wrote "If your currency loses value and is only worth $1500, then your ordinary gain is $1000. " Are you saying this should not be calculated and considered on a yearly basis? It should be calculated based on the original date of the investment into the savings account and the date the account is closed? This account is not being closed for now.