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How to Report Foreign Income on Your US Tax Return?

How to Report Foreign Income on Your US Tax Return?

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars.

How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country.

Note: Payments of U.S. tax must be remitted to the U.S. Internal Revenue Service (IRS) in U.S. dollars.

You must make all federal income tax determinations in your functional currency. The U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains separate books and records.

Even if you have a QBU, your functional currency is the dollar if any of the following apply.

  • You conduct the business in dollars.
  • The principal place of business is located in the United States.
  • You choose to or are required to use the dollar as your functional currency.
  • The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted.

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. You can generally get exchange rates from banks and U.S. Embassies.

If your functional currency is not the U.S. dollar, make all income tax determinations in your functional currency. At the end of the year, translate the results, such as income or loss, into U.S. dollars to report on your income tax return.

What Currency Exchange Rate Do I Use When Preparing my Tax Return?
Where you are a US expat, green card holder or a US resident who received income or paid any expenses in a foreign currency, you must translate the foreign currency into US dollars when preparing your tax return. The only exception relates to some qualified business units (QBUs) which are generally allowed to use the currency of a foreign country.

Allowable Currency Exchange Rates
What is important to remember is that the Internal Revenue Service has no official exchange rate. The IRS will normally accept any posted exchange rate that is used consistently. When preparing your Form 1040, Form 2555, Form 1116 or any other necessary tax form use the rate that applies to your specific facts and circumstances.

What exchange rate do I use if I received income such as interest or dividends in a single transaction in a foreign currency? If you have a single transaction such as interest income, dividend income or the sale of a business that occurred on a single day, use the exchange rate for that day.

What exchange rate do I use if I earned income or paid expenses in a foreign currency evenly throughout the year? You can translate the foreign currency to U.S. dollars using the yearly average currency exchange rate for the tax year.

Yearly average currency exchange rates
The table published on the IRS website at http://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates includes yearly average exchange rates for prior years. For additional exchange rates, refer to Foreign Currency and Currency Exchange Rates.

How do I use the table? To convert from foreign currency to U.S. dollars, divide the foreign currency amount by the applicable yearly average exchange rate in the table. To convert from U.S. dollars to foreign currency, multiply the U.S. dollar amount by the applicable yearly average exchange rate in the table.

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