It’s my annual “Taxes from A to Z” series! If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss, you won’t want to miss a single letter.
X is for XE.com.
For most taxpayers, reporting income is pretty straightforward because it’s typically in dollars. But what if you receive all or part of your income in foreign currency? You must translate that foreign currency into U.S. dollars since you must report income and expenses on your federal income tax return in U.S. dollars.
The timing of the conversion depends on your functional currency. For most taxpayers, your functional currency is the U.S. dollar. An exception exists for qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains its own books and records. However, a QBU only meets the exception if it does not conduct business in dollars; does not have its principal place of business in the United States; does not choose or is not required to use the dollar as a functional currency; and keeps books and records in the currency where most business activities are conducted.
If your functional currency is the U.S. dollar – again, this applies to most taxpayers – you must immediately convert items of income and expenses into dollars as you go. The exchange rate that you’ll use is the prevailing rate at the time that you receive income or pay expenses (or when the items accrue, for accrual-based taxpayers).
However, if your functional currency is not the U.S. dollar, you’ll make all income tax determinations in your functional currency throughout the year. At the end of the year, you’ll convert the results into U.S. dollars. You’ll report that final number in U.S. dollars on your income tax return.
So what does all of this have to do with XE.com? Easy. Calculating exchange rates can be tricky and it’s important to be precise in order to comply with reporting requirements. XE.com offers a live currency exchange rate converter which has been identified as an external resource by the Internal Revenue Service (IRS). The IRS has also identified certain government resources, including the Treasury Reporting Rates of Exchange (fixed as of a date certain), the Federal Reserve (also fixed, but updated weekly), and the Department of Agriculture (yes, really, with historical rates which download in Excel); external resources other than XE.com include Oanda.com and x-rates.com.
(Don’t forget: Crypto and digital currency are not considered currency for federal income tax purposes.)
For your taxes from A to Z, here’s the rest of the series:
- A is for Annual Contribution Limits
- B is for Bonus
- C is for Choate
- D is for Direct Deposit
- E is for Enrolled Agent
- F is for Found Money
- G is for Ghost Preparer
- H is for Hobby Loss Rules
- I is for Installment Agreement
- J is for Joint Accounts
- K is for Kin (Crypto)
- L is for Line of Credit
- M is for Mileage
- N is for NIIT
- O is for Organ Donations
- P is for Private and Parochial Schools
- Q is for Qualifying Relative
- R is for Relief Funds
- S is for Surviving Spouse
- T is for Taxpayer Bill of Rights
- U is for Unused Sick Leave
- V is for Voluntary Bankruptcy
- W is for W-9