Michael

I don't know who you are getting your tax advice from but it sounds like you should change advisors. It is all capital gains or capital losses. Currency like any other investment has capital gains and capital losses and are under the same tax laws as any other passive investment.

The tax law is based on an American investing in foreign equities, currencies, properties, or any passive investment that produces a gain or a loss. It is no different than if an American invested in a mutual fund that purchased UK equities. When the the mutual fund is purchased so many US$ was spent to purchase the fund and when it is sold, so many US$ are received. The IRS doesn't care how many pounds were used to purchase the mutual fund nor does it care how many pounds were received but only the amount of US$ that were paid and the amount of US$ received and that is all capital gains. The IRS doesn't make the investor try to figure out the exchange rate so that the IRS can tax part at one tax rate and another part at another tax rate. Since all of the investment combined is capital gain or loss in relation to the US$, it doesn't make any difference to the IRS.

In fact some of my investments outside the US were done purposely to take advantage of strong dollar in the hopes of selling the investment when the dollar was weak creating part of the gain from equity gains and part from a favorable currency exchange. When I purchased the equities, I wouldn't have purchased the equities if I thought the dollar would get weaker.