lansbury

I don't believe I have a gain on a foreign currency transaction. I have not sold currency and purchased it back at a profit.

It comes back to the IRS instructions: I understand that to mean you should use the exchange rate on the day you receive the payment, but for regular payments you can choose to average it out.

If the money stays in the UK and is worth x in dollars at the end of 2013 and x plus 10% at the 2014 because the exchange rate shifted, would you say I have to pay capital gains tax on that 10%?

Pulaski

In theory the calculation for FX gains losses would be to calculate the number of USD you would have received on the day you received GBP, and total that up for the year, then total up the number of USD you actually received after conversion from GBP.

It is actually a fairly straight forward calculation, and per IRS rules you would be fully justified in using the IRS average rate for the "base" half of the calculation. For example if you received £625/mth, and the IRS average rate is $1.6/£1, your "base" dollar amount is $1,000/mth. If however through canny timing of your conversions to USD you achieve actual receipts of $12,500, then the $500 is an FX gain chargeable to capital gains tax. .... Obviously with you holding GBP over the year end there would be some prorating to do.
You most certainly do have a gain (or a loss). On the day you receive GBP they are worth $x, but by timing your conversion you receive $y, and you appear quite pleased with yourself because $y > $x. The difference is an FX gain, and chargeable to capital gains tax.

lansbury

That makes it a bit of a nightmare. I will have to keep careful records of when I received the money, and what it was worth in dollars. Then when I transfer money track it back to the days it was received and how much I actually got as an exchange rate. Keep track of each transaction profit or loss and declare the total on my tax return.

Even if I use the average of the various rates I actually get for the year, I would still have to go back and check for any money not transferred in the same year as it was received. I shall have to go back and raise this with my CPA because he has not raised any objections to the way I was doing it.

MidAtlantic

But you might leave a pension payment in the UK for ever and never have an actual exchange. You still have to declare it on your US taxes and the IRS says you can use their average rate for the tax filing.

Pulaski

You're muddling two things: income tax on the income, which is calculated at the IRS average rate, and capital gains tax on the gain resulting from the change in exchange rate. If you receive £625/mth and the average rate is 1.6, you'll pay income tax on $12,000. If you move the whole £7,500 to the US on 12/31 when the actual rate is 1.65, you will receive $12,375 into your account, and the $375 is a chargeable capital gain.

Of course, as noted fairly recently in another thread here on BE, this is all rather esoteric, likely not done by many people, and unlikely to be a big deal for the IRS either, and that is supposing that an audit even noticed it. .... If you kept it in the UK and used it to fund trips to the UK and Europe the exchange "gain" would get lost in the wash anyway.