Money

Foreign Currency on Your US Tax Return: Which Exchange Rate Should Expats Use?

3 min read

In this guide
  1. Quick answer
  2. What is a functional currency?
  3. Yearly average rate or spot rate?
  4. How do you pay the IRS from abroad?
  5. A simple record-keeping method
  6. Common mistakes
  7. FAQ
    1. Where do I get exchange rates?
    2. Does this affect the foreign earned income exclusion?
    3. Is this the same for FBAR reporting?
  8. Key takeaways
  9. Related guides
  10. Sources

Which exchange rate should you use on a US tax return? The IRS says that if your functional currency is the US dollar, you translate each foreign-currency item at the exchange rate prevailing when you receive, pay or accrue it. All amounts on your US return must be in US dollars. If more than one rate applies, use the one that most properly reflects your income.

Quick answer

  • Your functional currency is generally the US dollar unless you are required to use the currency of a foreign country.
  • Translate each item at the rate prevailing when you receive, pay or accrue it.
  • If several rates apply, use the one that most properly reflects your income.
  • The IRS says rates are generally available from banks and US Embassies.
  • These rates do not apply to payments you make to the IRS.

What is a functional currency?

It is the currency in which you measure income and expenses. For most individual expats it is the US dollar, according to the IRS.

Your functional currency What the IRS says to do
US dollar Translate each foreign-currency item when you receive, pay or accrue it
Not the US dollar Make income tax determinations in that currency, then translate the results (such as income or loss) into US dollars at year end

Yearly average rate or spot rate?

The IRS page I checked does not say when to use a yearly average rate versus a spot rate on a date. It links to a separate page of yearly average exchange rates but does not explain when that rate applies. The only timing rule it states is the transaction-date rule above, so keep a record of which rate you used for each item and why.

How do you pay the IRS from abroad?

The IRS says the exchange rates on that page do not apply to US tax payments. It converts foreign-currency payments using the date the bank processes the conversion. See also our guide to expat filing extensions, because interest still runs on tax unpaid after the regular due date.

A simple record-keeping method

  1. List each income and expense item with its date and foreign amount.
  2. Record the rate you used and its source, such as your bank or an embassy.
  3. Convert to US dollars and keep the workings with your return copy.
  4. Use the same method for every item in the same category.

Common mistakes

  • Using one rate for the whole year without checking the rule. The IRS states a transaction-date rule.
  • Not keeping the source of the rate.
  • Applying return rates to IRS payments. Payments are converted on the bank’s processing date.
  • Mixing methods for the same type of income.

FAQ

Where do I get exchange rates?

The IRS says you can generally get rates from banks and US Embassies.

Does this affect the foreign earned income exclusion?

You still translate your foreign pay into US dollars. See our guide to the foreign earned income exclusion.

Is this the same for FBAR reporting?

This page is about income tax returns. Check the FBAR instructions for account-value conversion, covered in our FBAR guide.

Key takeaways

  • Most expats use the US dollar as functional currency.
  • Translate each item at the rate prevailing when received, paid or accrued.
  • Keep records of every rate and its source.

Last updated: October 2026. This guide is general information, not tax advice. Check the IRS or a qualified tax professional for your return.

Sources

  • IRS: Foreign currency and currency exchange rates

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