2025 IRS Exchange Rates: A Guide for Foreign Income Reporting

Why is the IRS Exchange Rate Important?

The IRS exchange rate is used to convert all foreign income and expenses into US dollars for US tax reporting purposes. This affects a variety of tax forms, including:

• Form 1040: For reporting worldwide income.
• Form 2555: For claiming the Foreign Earned Income Exclusion.
• Form 1116: For claiming the Foreign Tax Credit.
• Form 8938: For reporting foreign financial assets.

In order to meet IRS reporting requirements, US expats need to determine the exact amount of foreign income and expenses in US dollars. This exchange rate is especially important for expats who have income or assets in foreign currencies, as well as for those utilizing tax benefits like the Foreign Earned Income Exclusion or the Foreign Tax Credit.

Determining the Right Exchange Rate for 2026

When filing your 2025 US tax return in 2026, choosing the correct exchange rate is crucial for accurately converting foreign income into US dollars. US expats have two primary options to consider, depending on the nature of their income and financial transactions: the Annual Average Exchange Rate and the Spot Rate (Daily Rate).

1. Annual Average Exchange Rate

The annual average exchange rate represents the average value of a foreign currency relative to the US dollar over the entire tax year. This rate is especially useful for individuals with steady, recurring income, as it simplifies calculations and smooths out fluctuations in daily exchange rates.

• Who Should Use It:
  • US expats receiving consistent income, such as salaries, pensions, or rental income.
  • Those who prefer simplicity when preparing their tax returns.
• Advantages:
  • Avoids the complexity of tracking daily fluctuations in exchange rates.
  • Provides a single rate for the year, making it easier to calculate income totals.
• Considerations:
  • The annual average rate may not reflect the exact value of a specific transaction, particularly for significant one-time events.

2. Spot Rate (Daily Rate)

The spot rate, or daily exchange rate, refers to the specific exchange rate on a particular date. This option is more precise for transactions tied to a specific day or event, such as the sale of an asset, receiving a bonus, or making a large investment.

• Who Should Use It:
  • American expats with irregular income, such as commissions or bonuses.
  • Those who sell property, receive a significant inheritance, or report capital gains.
• Advantages:
  • Provides accuracy for one-time or large transactions.
  • Reflects the exact rate on the transaction date, which may result in a more favorable tax outcome.
• Considerations:
  • Requires meticulous record-keeping to match each transaction with its corresponding exchange rate.
  • May increase the complexity of preparing your tax return.

Choosing between the annual average exchange rate and the spot rate depends on your income sources and financial activities. For many expats, it may even be appropriate to use a combination of both methods.

For example, applying the annual average rate to regular income like a salary and the spot rate for one-time transactions like the sale of a property.

2025 IRS Exchange Rate

The IRS has published the official exchange rate for the 2025 tax year. This rate should be used when converting foreign currency to US dollars for preparing your 2025 US tax return, which is due in 2026.

Source: IRS.gov

How to Use the IRS Exchange Rate on Your US Tax Return

1. Identify Your Income Sources: Determine all sources of income earned during the year and categorize them by type (e.g., wages, self-employment income, interest, dividends).
2. Choose the Exchange Rate: Decide whether to use the annual average rate or the spot rate for each income type. Ensure consistency throughout your tax return to avoid discrepancies.
3. Convert Income and Expenses: Use the chosen exchange rate to convert all amounts from your foreign currency into US dollars. For expenses that are deductible, such as business or housing costs, ensure accurate conversion to claim the correct deduction.
4. Document Your Calculations: Keep detailed records of the exchange rates used, including their source and the calculations performed. This documentation is essential in case of an audit.

Sample Calculation Using the IRS Exchange Rate

To convert foreign income into U.S. dollars for your tax return, you divide the foreign currency amount by the IRS exchange rate for that year. For example, let’s say you earned an income of 1,500,000 Japanese yen (JPY) during 2025:

According to the IRS yearly average exchange rate table, the average Japanese yen rate for 2025 is 149.632 JPY per USD (meaning ¥149.632 = $1 USD).

Step‑by‑Step Calculation:

1. Take the foreign currency amount: ¥1,500,000

2. Divide by the IRS exchange rate: 149.632

¥1,500,000 / 149.632 = $10,024

So, when reporting this income on your US tax return, you would enter approximately $10,024. If you use a specific transaction date’s rate instead of the annual average for irregular or one‑time income, just replace the 149.632 rate with the rate for that specific date.

Common Mistakes When Using the IRS Exchange Rate

Using the IRS exchange rate incorrectly can lead to errors on your U.S. tax return and even trigger penalties. Here are the most common mistakes taxpayers make:

1. Mixing Up Exchange Rates – One of the biggest errors is using the FBAR exchange rate for your US tax return or using the IRS exchange rate for FBAR reporting. For US taxes, you must use the IRS exchange rate (annual average or transaction-specific). For FBAR (FinCEN Form 114), you must use the US Treasury year-end exchange rate for foreign bank accounts. Confusing the two can result in misreported income or account balances.

2. Using the Wrong Year’s Rate – Always use the IRS exchange rate for the tax year in which you earned the income. Using prior or future year rates can cause discrepancies.

3. Inconsistent Methods – Some taxpayers use annual average rates for regular income but then incorrectly switch to a different rate for the same type of income. Consistency is key.

4. Selective Rate Use – Some taxpayers attempt to reduce their tax bill by using higher rates for deductions and lower rates for income. The IRS recommends using the official IRS Exchange Rates, but it is also permitted to use any reputable source, including bank or online rates, as long as they are applied consistently. Using rates selectively to manipulate results is what often triggers audits.

Using the IRS Exchange Rate for Prior Year Tax Returns

When amending a prior year tax return or filing late for a previous year, it’s important to use the IRS exchange rate specific to that tax year. Each year, the IRS publishes official average rates for foreign currencies, and these rates must correspond to the year in which the income was earned.

Using the wrong year’s rate, or mixing rates from different years, can result in errors, underreporting, or overreporting of income.