gains and losses can differ when reported in USD vs CAD

[birder]

This is an issue that I've just been working through. I'm stating what I've concluded here rather than posting this as a question, but I'd appreciate either correction or confirmation that this is correct.

When you have an asset like a Canadian stock, ETF, bond or GIC where it is reportable/taxable on a US return, (outside an RSP, i.e. in a direct trading account *or* in a non-IRS-deferred account like a TFSA or RESP), you can't just compute your Canadian capital gain or loss, then convert that to USD.
Instead, you need to find out your USD cost basis, or 'book value,' separately by using the exchange rate of the date you bought the asset; then look at the gross proceeds of the sale and convert that into USD using the exchange rate for the sale date.
To find your US-reportable capital gain or loss, you subtract your USD book value (cost basis) from the USD value of the gross proceeds.
Since the exchange rate has varied so much over time, it is quite possible to have a sale that nets you a gain in CAD yet a loss when done in USD, and vice-versa. Even absent a sign change, the magnitude of the gain or loss will be different done this way than just converting the CAD gain or loss using only the sale date exchange rate.

As well, an fixed-value asset in CAD such as the principal of a GIC never makes a capital gain or loss in its 'native' CAD, but it *can* make a capital gain or loss in USD terms; the latter is what you'd need to compute and report in IRS returns.

[nelsona]

Yes, known issue. Reported here many times. Went through all this in mid=00's when the exchange shift was the other way.

Currency fluctuation always results in more tax wen dealing cross-border.

[birder]

In my initial post, I think I was mistaken in suggesting that a transaction such as buying a GIC and then getting back the principal amount, if done purely in CAD, would count as having a 'capital gain/loss' in USD -- or perhaps an ordinary gain/expense.

However, I got to thinking that simply holding CAD balances in cash or GICs is not a 'foreign currency transaction' - if you earn CAD, put them in the bank, buy GICs with them, and later take CAD back out again, you have not made an investment *of* USD.
I found several pages that go into more detail about how the IRS treats foreign exchange gains and losses. It varies between individual(personal) and business activity. The key issue is that you need a currency conversion transaction, e.g. USD into CAD, plus a return transaction of USD into CAD, to bring in these currency gain/loss rules.
So if you take some USD, convert them, invest in a CAD asset, sell it, *and convert the proceeds back to USD*, then you have exchange rate gains or losses on top of any gain or loss in CAD. Those can be reportable as capital or ordinary gains. There are IRS docs on how to track and report foreign exhchange gains & losses.
But if you simply take CAD you have, buy a GIC, and get the face value back in CAD when it matures, I now suspect this does NOT produce reportable currency gains or losses. You just convert, e.g. interest earned into USD at the appropriate rate - exact date for one-time payment, or year average for frequent interest dribblets.

This page has some detailed comments on these issues, and links to IRS docs.

http://www.quora.com/Foreign-currency-b ... by-the-IRS

[nelsona]

Yes the GIC is a standalone transaction which must be converted to US both at the purchase and sale. It therefore certainly can have Fx gains and losses, which may be reportable.,

Look, you haven't discovered anything, We've discussed this here many times.