How do fluctuating currency values affect my taxes?
The IRS would do a happy dance if each foreign income earner would make currency conversions on a daily basis. However, the IRS also allows you to do a quarterly or annual conversion, especially if the foreign currency is pegged to the US dollar or does not fluctuate very often. Annual conversions are also allowed for income streams that are fairly even throughout the year.
However, and this can be a big however, there are some advantages to pinpointing currency exchange rates. Let’s say you receive a bonus during a time of the year when the US dollar is weak. At the end of year, the US dollar miraculously makes a comeback and strengthens against the host country’s currency. The difference in currency exchanges can dramatically change the value in terms of US dollars.
Each situation is unique- keep track of any unusual spikes in your income or expenses, or wild swings in currency so you can determine if the timing of your currency conversion will be to your advantage. Also keep track of any one-time deals such as bonuses, gains on sale, etc.