IRS Exchange Rates for Expats Filing US Taxes

As an American expat, it may come as no surprise that converting foreign currency to US dollars is a crucial step for filing US taxes. Even if the IRS has foreign exchange rates, different methods are still used for exchanging currencies and how they are reported. In this article, we will guide you through how to apply IRS foreign exchange rates accurately for your tax return.

Why Do IRS Foreign Exchange Rates Matter for Expat Taxes?

Foreign exchange rates are important for expats who need to file a US tax return to report their worldwide income. As the US dollar is the American currency, showing all financials as a dollar amount is mandatory. The IRS foreign exchange rates are critical for correctly reporting common expat documents such as FATCA Form 8938, Form 2555, and Form 1116.

What is the IRS Foreign Exchange Rate?

The IRS foreign exchange rate is an annual average that can be used for consistent transactions throughout the year. These rates can be very helpful for consistent income, such as salaries or rental income. They can also prevent audits and penalties as they are sourced from the IRS.

Situations in which the IRS yearly average exchange rates should be avoided are one-time transactions such as selling business assets or property. If possible, the exchange rate should be used on the date of sale.

Can’t Find an Exchange Rate on the IRS Website?

The IRS does not list every currency on its website, so in this case, expats should use other reliable sources such as:

• The US Department of the Treasury
• The Federal Reserve
• Financial institutions like OANDA or XE

These sources should also be used when receiving a daily exchange rate for one-time transactions.

How to Convert a Foreign Currency to US Dollars

Use this formula to calculate the US exchange rate:

Calculating with Income:

If you have a salary of £38,000, you can use the IRS average exchange rate as this is a consistent income stream.

• £38,000 ÷ 0.783 = $48,531.30
• $48,531.30 × 0.783 = £38,000

Calculating with Assets:

This simple formula can also be applied to assets, but when applied to assets, the actual sale price during the calendar year must be taken and converted. For instance, say a piece of property was sold for €20,000 on June 12th, 2024, and as this was a one-transaction, a daily rate must be applied.

• €20,000 x 1.08733 (On June 12th, 2024) = $21,746.6

The $21,746.6 would be the converted amount reported on your 2024 tax year.

Which IRS Exchange Rate Should You Use When Filing FBAR?

IRS foreign exchange rates cannot be used for FBAR filing! When filing an FBAR, expats must use the US Department of Treasury’s specific year-end exchange rates. Using IRS foreign exchange rates instead could result in a fine of up to $10,000.

Automate the Process with MyExpatTaxes

Currency conversions can be tedious and increases the likelihood of mistakes, so to avoid having to amend any incorrect returns, try using the MyExpatTaxes tax software. Our software will automatically adjust your foreign income and assets, simplifying your filing process!

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