Capital Gains on Foreign Currency

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GlobalCitizen
Posts: 20
Joined: Sat Jan 03, 2015 8:58 pm

Capital Gains on Foreign Currency

Post by GlobalCitizen »

I have recently come to understand that in Canada, capital gains must be tracked on foreign currency. So, say I have a USD account. I need to find the exchange rate for the day I received those dollars and convert them to CAD on the date received to determine my adjusted cost basis. Then, any time I dispose of income in any way (even buying goods), I need to convert the amounts to CAD using the exchange rate for that day. I understand that Canada has a $200 threshold on net gains from foreign currency, so that the average person does not need to worry about tracking these amounts.

Does the IRS have the same rule?

As a US citizen living in Canada, I receive all of my income in Canadian dollars to my Canadian bank account. I make purchases in CAD using this money, and I also use Canadian credit cards Should I be tracking the fluctuations in currency to determine if there is a capital gain, or would there only be a gain if I exchanged it to USD?
nelsona
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Re: Capital Gains on Foreign Currency

Post by nelsona »

They have the dsame concept, but I wouldn't worry about it, unless you make a huge purchase.
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GlobalCitizen
Posts: 20
Joined: Sat Jan 03, 2015 8:58 pm

Re: Capital Gains on Foreign Currency

Post by GlobalCitizen »

Thank you for your reply.

I suppose the $200 threshold is enough to make this irrelevant in most cases.

It would be rather odd and impractical to be that anal about tracking all my transactions. 😊
igrek
Posts: 12
Joined: Wed Aug 13, 2014 4:38 am

Re: Capital Gains on Foreign Currency

Post by igrek »

I could not find a clear answer on Internet about how this works with loan / mortgage interest. The unclear part is whether the interest you pay is counted as part of your payment back. To use a simple example: Suppose you borrow $1 million CAD when exchange rate is 1:1 (so it is worth $1 million USD), and you pay it back in full with accumulated interest $200,000 CAD when the exchange rate is 1 CAD = 0.9 USD. If interest is not counted as part of your payment back, then from the US perspective you borrowed 1 million USD but paid back 0.9 million USD, and you have to pay tax on $100,000 USD income (your gain). If interest is counted as part of your payment back, then you borrowed $1 million USD but paid back 0.9*1.2=1.08 million USD, so you do not have any gain and owe no tax. Which way is correct? Any clarification would be appreciated.
nelsona
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Re: Capital Gains on Foreign Currency

Post by nelsona »

I believe It is based on the principal left at the time you pay the mortgage.

You 'bought' the $1 million mortgage at one exchange rate. You apply that rate to your remaining principal, and compare it to the exchare rate when you 'sell'.
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igrek
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Joined: Wed Aug 13, 2014 4:38 am

Re: Capital Gains on Foreign Currency

Post by igrek »

Thank you Nelsona.

I understand that with large loans taken in Canada, if CAD decreased with respect to USD, a way to eliminate the US tax would be to re-pay the loan in small installments. For example, a $200,000 loan could be re-paid within a year by making 200 daily re-payments each worth $1000. Then each such payment would be considered as a separate tax event subject to the $200 exclusion, and no tax would be incurred.

With respect to a mortgage, a way to minimize the likelihood of exposure to the exchange rate tax would be to pay it out weekly instead of monthly. Then the payments are smaller and hopefully fall within the $200 exclusion rule.

Is my thinking correct?
nelsona
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Re: Capital Gains on Foreign Currency

Post by nelsona »

I've not seen this taxable gain applied to installments. It is the final settling of the mortgage that raises tax issue.
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igrek
Posts: 12
Joined: Wed Aug 13, 2014 4:38 am

Re: Capital Gains on Foreign Currency

Post by igrek »

Is the foreign exchange gain taxed by the U.S. at capital gains rate or at (higher) ordinary income rates? Different sources say different things.
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