Foreign Currency Deposit Gains: What the IRS Actually Taxes
Holding a foreign currency deposit — euros, yen, or any currency other than the U.S. dollar — creates a tax question most people overlook: what happens to the gain if the exchange rate moves in your favor by the time you withdraw? Under IRC Section 988, gains from personal foreign currency transactions are generally taxed as ordinary income at your marginal rate, not at the lower long-term capital gains rate. There is one helpful carve-out: the de minimis rule exempts personal transaction gains of $200 or less from tax entirely.
Tax Treatment Summary
| Item | Tax Treatment |
|---|---|
| FX gain | Ordinary income; exempt if $200 or less (IRC §988(e)) |
| FX loss | Generally not deductible for personal transactions |
| Deposit interest | Ordinary interest income, fully taxable |
Your actual outcome also depends on your bank's buy/sell exchange rate spread and any conversion fees, which this calculator doesn't include since it uses the rates you enter directly. Because personal FX losses generally aren't deductible while gains over $200 are taxable, currency movement risk is asymmetric for individuals — worth factoring in before holding foreign currency for speculative reasons. This tool is a simplified reference; consult a tax professional for your specific situation.
Frequently Asked Questions
Yes, generally as ordinary income under IRC §988, unless the gain is $200 or less, which is exempt.
No, interest is always taxable as ordinary income — the $200 de minimis exception doesn't apply to it.
Generally no, personal (non-business) FX losses aren't deductible, unlike gains which are taxed above $200.
※ Bank spreads and conversion fees not included; simplified reference estimate. Consult a tax professional.