Unrealized Foreign Exchange Gain Taxable
Are unrealized foreign exchange gains and losses taxable?
ADSENSE
For example, a corporation borrows money denominated in a foreign currency during the year. As of year end, the foreign currency has decreased in value against the US dollar, thus for accounting purposes the loan is adjusted to its US dollar equivalent and an unrealized foreign exchange gain is recorded. Would this gain be taxable or is it only taxable when realized (i.e. when the loan is paid)?
I am asking specifically for the United States federal tax rules. I am familiar with the Canadian tax rules for foreign exchange but can’t find any information on the US rules.
Good question. You probably have seen this:
“Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income.”
http://www.irs.gov/businesses/small/article/0,,id=130524,00.html
Periodic payments or accrual of interest under the loan may generate foreign currency gain or loss under ยง 988. The gain(loss) is partially realized each time a payment against the loan is made or an accrual recorded. Makes for a delightfully complicated calculation.
The accounting adjustment you describe for unrealized fx gain does not sound like an accrual per se UNLESS your accounting also books accrued loan interest and uses it as an expense for tax accounting purposes. In this case, the accrued loan interest is booked in US Dollars, with the appropriate currency conversion. The foreign currency income(loss) is thus built into this entry.
Hope this helps.
