When reporting foreign earned income in US dollar amounts, do I convert using the current exchange rate, or the most frequent exchange rate from last year?

[phatchanz]

Since this is currently a higher US dollar amount than what it was when the income was earned, I am not sure how it would make sense to report this income using the current exchange rate (0.70 USD per CAD vs. 0.78 USD per CAD).

[JaneS · Accepted solution]

This is from the IRS website. It looks like you can use any posted exchange rate for the year.

Exchange Rates

1.  When converting foreign currency to U.S. currency for purposes of filing a U.S. tax return, what foreign currency exchange rate should I use?

The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently.

If you have a single transaction, such as the sale of a business that occurred on a single day, use the exchange rate for that day. However, if you receive income evenly throughout the tax year, you may translate the foreign currency to U.S. dollars using the yearly average currency exchange rate for the tax year.

If there is more than one exchange rate, use the one that applies to the facts and circumstances on a consistent basis. Refer to the Foreign Currency and Currency Exchange Rates web page.

[BobinDC]

There is an additional problem not addressed in this answer.  The foreign currency rates are typically the interbank rates, i.e., those used by banks.  You cannot get that rate if you are converting foreign currency into US dollars.  The appropriate rate is the actual rate that occurred at the time of conversion.

[ptx1223]

That's if you know it. Some folks have monthly payments and might get only two summary statements a year, sans all the pay dates. The alternative would be trying to figure all the amounts (plus any tax withholding) based on when the money arrived in a US account (which might be x days after the transaction occurred). Some people use the interbank rate anyway, but maybe the yearly average found on the IRS site could be a better choice. I just checked, and it seems to be based on a consumer cash rate (interbank + 4%) that you can also get on Oanda.