Tax consequences when foreign currency changes in value

External question — Personal Finance Stack Exchange Author: Nate Eldredge Original post: https://money.stackexchange.com/questions/43586 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. As a US taxpayer, if I hold some foreign currency that gains or loses value, what are the tax consequences when I exchange the currency for US dollars or other goods or services? Let's take a concrete hypothetical example. Suppose in January the exchange rate of pesos to dollars is 10 pesos to the dollar. I take US$500 and exchange it for 5000 pesos. Suppose in May, the peso has strengthened and the exchange rate is now 8 pesos to the dollar. If I exchange my 5000 pesos for US$625 at this rate, is my $125 profit taxable? How do I report it? Suppose that instead of exchanging my pesos for dollars, I use them to buy some goods or services. Say I spend my 5000 pesos on a crate of fine tequila for which the fair market value is US$625. Do I have a taxable gain, and how do I report it? Suppose instead that the peso weakened and in May the exchange rate was 15 pesos to the dollar. If I exchange my 5000 pesos for US$333, or goods or services to that value, can I deduct my loss of $166? How do I report it? Does the taxability depend on the dollar amounts in question? If so, what are the limits? If it makes a difference, assume that I held physical currency (rather than a bank account or similar asset), and that I am not in the business of currency trading. This is somewhat similar to When and how should I pay taxes on ForEx trades? , but that question is specific to Israeli tax law instead of US, and also does not consider the case of exchanging for goods and services.