So what about money you gain or lose due to the movements of currency exchange rates? Those gains and losses are taxed at the same rate as the original transaction. Therefore, if the coupon payment on your bond is taxed at your normal income tax rate, related currency gains are taxed at that rate as well. If you lose money on an investment due to currency rates, that loss is usually treated as an expense. When you sell an investment, you include currency gains or losses as part of your capital gains or losses.
On the road
Some investors buy and sell other countries' currencies in the hopes of making a profit based on exchange rates. You may have enjoyed a small taste of this if you've traveled abroad and discovered a favorable exchange rate on your way home.
For example, suppose you'd exchanged $100 for 1.4 million Vietnamese dong, and on your way back to the U.S. you exchanged the same 1.4 million Vietnamese dong for $110, due to changes in the exchange rate. You'd have a currency gain of $10.
Currency gains and losses on personal transactions, as long as they fall under $200, aren't taxed. But currency gains above $200 are taxed as capital gains. Currency losses on personal transactions aren't deductible.
If you're involved in trading currencies — for example, using options and futures contracts — those transactions are taxed as commodities trading under Internal Revenue Code Section 988.
Jeffrey Rosensweig, Goizueta Business School, Emory University
Jeffrey Rosensweig, Goizueta Business School, Emory University 