How Currency Fluctuations in 2025 Affect Your 2026 U.S. Tax Return

For many U.S. expats, currency changes are simply a part of daily life—your salary may be paid in one currency, your rent and expenses in another, and your savings in yet another. But when it comes to your U.S. tax return, currency fluctuations do more than change your buying power. They directly impact how much income you must report, how deductions are calculated, and even how the IRS views your foreign financial accounts.

Most expats are surprised to learn that they must convert all foreign income and expenses into U.S. dollars using IRS-approved exchange rates. With global currencies shifting rapidly throughout 2025 due to economic cycles, inflation trends, and geopolitical events, these fluctuations may significantly affect your 2026 tax filing.

Here is what every expat needs to know before tax season arrives.

1. You Must Convert All Foreign Income Into U.S. Dollars

No matter what currency you earn or spend in, the IRS requires that all income be reported in USD. This includes wages, freelance income, rental payments, interest, dividends, and capital gains. The IRS allows several acceptable methods for conversion depending on the type of income, including:

  • The yearly average exchange rate
  • The exact daily rate (for specific receipts)
  • Consistent monthly or quarterly averages

Choosing the right method can impact your taxable income. For example, a weak dollar relative to your foreign currency may increase your reportable income, while a strong dollar may reduce it.

2. Currency Gains and Losses May Be Taxable

Many expats hold foreign bank accounts or investments in other currencies. When currency values shift, this can create foreign exchange gains or losses, especially when transferring funds between accounts or converting savings.

Some of these fluctuations may be considered taxable under U.S. law, depending on the type of income and the transaction. While personal currency fluctuations (such as exchanging money for daily expenses) are generally not taxed, gains connected to investments, business income, or financial instruments may be.

Understanding which transactions are taxable avoids surprises when filing your 2026 return.

3. Currency Value Affects Your Eligibility for the Foreign Earned Income Exclusion (FEIE)

The FEIE allows qualifying expats to exclude up to a set amount of foreign earned income each year. If the currency in your host country strengthened significantly against the dollar in 2025, your converted income may push you closer to the FEIE limit than expected.

For example, an expat earning 80,000 euros could report very different amounts in USD depending on the exchange rate. This could determine whether part of your income becomes taxable or whether you should rely more on the Foreign Tax Credit (FTC).

4. Currency Rates Influence Foreign Tax Credit Calculations

If you pay taxes to a foreign country, you may be eligible for the Foreign Tax Credit. But both the foreign income and taxes paid must be converted to U.S. dollars using consistent, IRS-approved rates.

Large fluctuations in 2025 can alter how much credit you are eligible to claim in 2026. Using the wrong conversion rate can result in lost credits or filing errors that may trigger IRS notices—issues that can be avoided with proper year-end planning.

5. FBAR and FATCA Reporting Depend on Currency Conversion

Foreign financial account thresholds are measured in U.S. dollars. If exchange rates shift dramatically, your foreign account balances may be higher—or lower—than expected once converted.

For FBAR:
You must file if total foreign account balances exceed 10,000 dollars at any point in the year.

For FATCA:
Thresholds are higher but vary depending on filing status and residency.

Currency changes can unexpectedly push accounts past reporting thresholds. Reviewing balances before year-end helps ensure full compliance.

6. How to Prepare for 2026 Tax Season

To file accurately, expats should:

  • Keep detailed records of foreign income as received
  • Note dates for large deposits, withdrawals, or transfers
  • Track foreign taxes paid
  • Review fluctuations in savings and investment accounts
  • Choose an IRS-approved exchange rate method consistently

Working with an expat tax professional eliminates guesswork and ensures accurate reporting.

At Expatriate Tax Returns, our CPAs and IRS Enrolled Agents specialize in the intricacies of currency conversion, global income reporting, and IRS compliance—so you can file confidently and avoid costly mistakes.

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