When converting foreign currency to U.S. currency for purposes of filing a U.S. tax return, what foreign currency exchange rate should I use

When converting foreign currency to U.S. currency for purposes of filing a U.S. tax return, the Internal Revenue Service (IRS) does not mandate an official exchange rate. Generally, the IRS accepts any posted exchange rate that is used consistently. Here are the guidelines for different scenarios:

1. Single Transaction: If you have a single transaction, such as the sale of a business that occurred on a single day, use the exchange rate for that specific day.
2. Income Received Evenly Throughout the Year: If you receive income evenly throughout the tax year, you may translate the foreign currency to U.S. dollars using the yearly average currency exchange rate for the tax year.
3. Multiple Exchange Rates: If there is more than one exchange rate available, use the one that applies to the facts and circumstances on a consistent basis.
4. Foreign Financial Assets: For specified foreign financial assets, the U.S. Treasury Department's Bureau of the Fiscal Service foreign currency exchange rate is generally used to convert the value of the asset into U.S. dollars. If no such rate is available for a particular currency, another publicly available foreign currency exchange rate may be used, provided the source of the exchange rate is disclosed on Form 8938.
5. Periodic Account Statements: For financial accounts, you may rely on periodic account statements provided at least annually by or on behalf of the financial institution maintaining the account, including the foreign currency conversion reflected in those statements, unless you have actual knowledge or reason to know that the statements do not reflect a reasonable estimate of the maximum account value during the taxable year.
6. Determination Date: When converting the currency of a foreign country into U.S. dollars for purposes of determining the maximum value of a specified foreign financial asset and the aggregate value of specified foreign financial assets, the applicable foreign currency exchange rate is the rate on the last day of the taxable year of the specified person, even if the specified person sold or otherwise disposed of a specified foreign financial asset prior to the last day of such year.

For more information, you can visit the IRS's Foreign Currency and Currency Exchange Rates page.

Sources:
Publication 54 (2023)
Rev. Proc. 2020-44
U.S. Tax Review
Publication 514 (2023)
§ 1.6038D-5. Valuation guidelines.