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  1. In the example above of the $400k gain from the repayment of the mortgage, is this capital gain or ordinary? What’s the IRS position on this?

  2. Phil, what else in the everyday life of an American living abroad could be considered a forex transaction worthy of reporting on a tax return?

    Every time I use my credit card my bank is lending me Canadian dollars. Should I be calculating the U.S. dollar equivalent of every purchase on the purchase date and then compare the sum to the U.S. dollar equivalent of my payment (always in full) on the payment date? In years when the exchange rate moves up and down this could net out close to zero. But in years when the exchange rate moves mostly in one direction there could be a gain (or loss) a little too big to ignore.

    What about routine transactions in a checking account? Salary in. Checks and cash out to pay for ordinary household expenses (not investments or loan repayments). The exchange rate could be different on the dates of the inflows and outflows. Is there a gain (or loss) to consider here even though the two transactions — trade labor for Canadian dollars and then trade Canadian dollars for groceries — are not with the same counterparty as in the loan example?

  3. @DRW

    Thanks for the comment. I agree that converting to investment property is a good strategy.

    But really. The reason this is a problem is because of citizenship-based taxation. The United States wants a piece of you if you are living abroad.

    Then the Internal Revenue Code indiscriminately applies currency exchange taxation rules to humans and multi-billion dollar enterprises indiscriminately. This is the hallmark of a broken system. What makes sense when $100,000,000 is on the line does not make sense when the amount in question is $100,000.

  4. Good article. Before you sell, you could convert your primary residence to an investment property, so the loss would be deductible. Or you could leave the home vacant (using it as a vacation home while you pay the mortgage, into very attractive financially) so that if it is no longer your primary residence for over 3 years of the last 5, you do not meet the “2 out of 5 most recent years” test.

    The treatment of foreign currencies has other consequences.
    If you have a CD in foreign currency and are rolling it over automatically, every time the CD matures you are deemed to have exchanged the foreign currency for dollars and back into foreign currency, generating a gain or loss.

    Paying for a stock with Euro? You are considered to have sold that amount of Euro from your savings or demand account. Now what is the basis of those Euro? Well, some came from salary and interest received at different times, etc. Good luck.

  5. Yep. There is a lot wrong with the U.S. tax system. A new IBS in Europe would be good.

  6. The above example is plain wrong. The US has no right to tax abroad in this matter, particular when there’s no capital gain in Euro terms. Someone needs to contact ‘US persons’ across the EU and start raising money similar to the IBS effort in Canada. When I see an American born person on EU TV I take note of their name and put it down on a list for later use if such a campaign gets launched. All these people are EU citizens, from the assistant head of the British Museum, a UK radio DJ, a well known lady in Germany running her own cosmetics company, Bernie Sanders’s brother running as a Green MP in the UK, the former Mayor of Cambridge, England, or an Irish Senator. I’m sure there are many more examples. If they haven’t already renounced, are they going to be happy paying $2350 fee to the US Government and send off some 5 years of tax returns? Or paying an exit tax because they own a appreciated house in Central London? The FATCA clock needs to be turned back for resident citizens in those countries.

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Tax laws change over time, and the information in this post above may be less accurate today than it was at the time of the last revision. This post is not tax advice for your specific situation. Please contact an international tax professional to get personalized advice for your situation.