I have a client who is a US citizen, but lives & works in a foreign country. Do I use the current exchange rate or one as of 12/31/20 for converting her wages & withholdings? I can find the current rate, but am having difficulty finding the exchange rate as of 12/31/20.
“If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc., that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. If there is more than one exchange rate, use the one that most properly reflects your income. In most cases, you can get exchange rates from banks and U.S. embassies.”
I should add, this rule is different from the reporting rule for FBAR/Form 8938, which uses the last day of the year to determine the value of the foreign account. Yes, in your case you need to look at the actual exchange rate for the date the income or deduction occurred, not just one date for the whole year.