Can Section 988 be Used for Foreign Currency Losses on Canadian Tax Refund?

I relocated from Canada to the US about 4 years ago and became a US tax resident. The year after I moved, I received a final tax refund of around 3,800 CAD from the Canada Revenue Agency. I just kept the money in my Canadian account without converting it. Fast forward to now, and the Canadian dollar has significantly declined against the USD compared to when I first received the refund. I'm thinking about finally converting this money to USD, but I'm wondering if there's a tax angle here. Would this currency depreciation qualify as a foreign exchange loss under Section 988 that I could use to offset my income on my US tax return this year? Has anyone dealt with forex losses on foreign tax refunds before?

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18 comments

Melody Miles

•8M

This is actually a great question about Section 988! Yes, this would typically qualify as a personal foreign currency transaction under Section 988. When you convert your CAD to USD and realize that loss, you should be able to claim it. The key points: you received the CAD refund as a result of a personal transaction (your former Canadian tax situation), you're a US tax resident now, and you've experienced an actual currency loss when measured in USD. When you convert the funds, that's when the loss becomes "realized" for tax purposes. You'd report this as a miscellaneous itemized deduction on Schedule A, but here's the catch - under current tax law, miscellaneous itemized deductions are suspended until 2025. So unfortunately, while it qualifies as a Section 988 loss, you probably can't benefit from it on your tax return right now.

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Melody Miles

•8M

That's a common misunderstanding. The tax treatment depends on the nature of the transaction. For personal transactions under Section 988, the losses are considered miscellaneous itemized deductions, not capital losses. For traders or if the foreign currency is part of an investment strategy, then they might be reported as capital losses on Form 8949 and Schedule D. But for personal transactions like a tax refund, they fall under miscellaneous itemized deductions, which as I mentioned, are currently suspended.

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Eva St. Cyr

•8M

After struggling with a similar forex situation last year (mine was with pesos from working in Mexico), I stumbled across this tool called taxr.ai (https://taxr.ai) that totally saved me. It has this feature that automatically identifies Section 988 transactions from bank statements and categorizes them correctly. It analyzed my statements, found the currency conversion transactions, and clearly explained how they should be reported. The software even showed me the specific sections of the tax code that applied to my situation and created documentation I could use if I ever got audited.

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Eva St. Cyr

•8M

It works with any currency that has an official exchange rate published by the Treasury Department, which includes most world currencies including Romanian Lei. The system uses historical exchange rate data to calculate gains/losses accurately. The accuracy is actually impressive for specialized tax situations. It references the actual IRS regulations and revenue rulings specific to Section 988. What impressed me was that it showed exactly which parts of the tax code applied to my situation and explained why the transactions qualified under those specific provisions.

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Kaitlyn Otto

•8M

I was really doubtful about taxr.ai handling my currency exchange situation, but I decided to try it last weekend. Wow - it actually worked incredibly well for my Section 988 questions. I uploaded my Canadian bank statements and it identified exactly when I received funds and what the exchange rates were at each point. The system even flagged that some of my transactions were actually qualified business transactions under 988(a)(1)(B) rather than personal, which changed how I needed to report them! It generated a detailed report explaining exactly how to fill out Form 8949 versus what goes on Schedule A. Saved me hours of research.

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Axel Far

•8M

I had this exact same situation with a UK tax refund, and after trying to call the IRS for clarification THREE separate times (and spending hours on hold each time), I finally used Claimyr (https://claimyr.com) to get through to an agent. They have this service where they navigate the IRS phone tree for you and call you back when they have an actual human on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that while yes, Section 988 applies to personal foreign currency transactions, the loss is considered a miscellaneous itemized deduction that's suspended until 2025. But she also mentioned there might be exceptions depending on your specific situation and recommended I consult with a tax professional.

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Axel Far

•8M

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Luis Johnson

•8M

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