For capital gains on bonds held in a foreign country, do I compute the BASIS using the exchange rate at the date of acquisition or the exchange rate at the date of sale?

[GeoffreyG]

That is a very good question.  The answer to is that you should calculate your cost basis using the foreign exchange rate (i.e., foreign currency units per $US dollar) in effect on the day you originally acquired the bonds.  To calculate your net proceeds realized upon sale or redemption, you would use the foreign exchange rate in effect as of that day.  Thus, you'll essentially need to make (2) foreign currency conversions (one historical and the other relatively current), to calculate your capital gain or loss for US tax purposes.

But there are many places on the internet where you can look up such historical values for any currency pair, so that part should be fairly easy and purely mechanical.

Also, it is helpful to note that the foreign exchange conversion rules for purchase and disposition apply to any asset or other investment, and not just foreign bonds.  In other words, you'd apply them to stocks, partnership interests, real property, mortgage payments, etc.

Thank you for asking this important question.

[reinhartkind]

Thank you. Do you have a citation for this?

[GeoffreyG]

Hello reinhartkind:

Thanks for your follow-up question.  While I don't have a full legal citation for you, this concept is a long-standing principle in international taxation, as well as international financial (non-tax) accounting; and it applies to taxpayers whose primary currency is the United States dollar.

It is discussed in layman's terms on the following official IRS.gov webpage (but without any corresponding legal citations):

<a rel="nofollow" target="_blank" href="https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates...>

In particular, there is a relevant quote there that reads:

"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."

Really, when you take a moment and think about it, the basic underlying principle is logical, and it makes good common sense.  To disaggregate foreign currency exchange rate fluctuations from price movements in the underlying assets would just add another layer of complication to an already cumbersome tax code.  By having such a straightforward foreign currency rule in place (i.e., translate all transactions completed in a foreign currency back to U.S. dollars at the moment in time they occur), it simply makes things easier.  This is true both for the taxpayer, and for the government (in their role as potential tax auditor).

Thanks again, and good luck with your future investing.

[reinhartkind]

Thank you very much. This works for me. Best help desk anywhere.

[M42]

A great resource for foreign exchange rate data is the St. Louis Fed Economic Research unit -- <a rel="nofollow" target="_blank" href="https://fred.stlouisfed.org/categories/15">https://fred.stlouisfed.org/categories/15</a> -- where they provide daily, monthly, yearly exchange rates for many major currencies going back many years.