Diversifying Outside the US Dollar: Multi-Currency Accounts for American Entrepreneurs

Holding part of your money in euros, Swiss francs or dirhams can make sense if you earn, spend or plan to live in those currencies. A multi-currency account is the usual tool. Before you open one, separate two ideas that often get blended: diversifying your currency and diversifying where your money is held. The first changes your exchange-rate exposure. The second changes your reporting, your deposit protection and your bank relationship. Your choices on each are separate decisions.

This is general information. Your CPA and counsel confirm the details for your case.

Where the account sits decides the reporting

The IRS looks at where an account is held, not at the nationality of the bank. ¹ A euro balance in an account maintained in the United States is a US account. The same balance at a bank abroad is a foreign account, even if the bank is a branch of a US institution.

Once your foreign accounts together exceed $10,000 at any time in the year, every one of them goes on your FBAR. ² To value them, convert each account's highest balance using the Treasury Reporting Rates of Exchange for the last day of the calendar year. ¹ Treasury describes these as the US government's authoritative exchange rates, published quarterly. ³

Note one detail. Foreign currency you hold directly, as cash rather than in an account, is not reported on Form 8938 or on the FBAR. ² The reporting follows the account, not the currency.

Your tax return stays in dollars

Whatever currencies you hold, you report in dollars. The IRS requires the amounts on your US return to be expressed in US dollars, and your functional currency is generally the dollar. ⁴ Interest earned in euros, for example, is translated into dollars using the exchange rate prevailing when you receive or accrue it. ⁴

The IRS has no official exchange rate and generally accepts any posted rate that you use consistently. ⁵ Pick a source, note it in your records and keep using it. Mixing rates from different providers across the year makes your figures harder to support.

Currency movements can create taxable gains

Exchange rates move, and the tax code notices. For personal transactions, such as spending euros you bought earlier, an individual does not recognize a gain from exchange-rate changes on disposing of foreign currency, unless the gain on the transaction exceeds $200. In that case, the exclusion does not apply. ⁶

Business use is treated differently. Foreign currency gains and losses from section 988 transactions are computed separately and treated as ordinary income or loss. ⁶ If your company invoices in euros, holds the balance and converts later, the movement between invoice and conversion can produce ordinary gain or loss. Your CPA needs those conversion records.

Deposit protection works differently in each country

At an FDIC-insured bank in the United States, deposits in a foreign currency are insured, with coverage determined and paid in the US dollar equivalent. ⁷ The standard maximum deposit insurance amount is $250,000. ⁸ That protection applies to deposits at an FDIC-insured institution. For a bank abroad, ask which deposit protection scheme applies, and to what amount, before you move a large balance.

Two practical routes

The first route is a multi-currency account at a US institution. It gives you currency exposure without creating a foreign account, and it may fall within US deposit insurance if the institution is FDIC-insured. It does not diversify where your money is held.

The second route is an account at a bank in another country. It diversifies both the currency and the institution, and it can support a future move or a business there. It brings the FBAR once your foreign balances pass $10,000 and, at higher balances, Form 8938. It also depends on the bank accepting you as a US client. ²

You can use both. A US account handles day-to-day currency needs, and a foreign account serves a specific purpose in a specific country.

What this means for you

Decide what problem you are solving. If you need to pay or save in another currency, a US-based multi-currency account may be enough. If you want assets held outside the US system, you need a foreign account and the reporting that comes with it. In both cases, keep dollar records that a CPA can follow.

What to do this month

• List the currencies you earn, spend or expect to need in the next three years.
• Check whether each account you hold or plan to open is maintained in the US or abroad.
• Choose one exchange-rate source for your records and use it consistently.
• Ask any foreign bank which deposit protection scheme applies to your balance.

Common mistakes to avoid

• Assuming a well-known bank's foreign branch counts as a US account.
• Forgetting that business currency conversions can produce ordinary gains or losses.
• Assuming US deposit insurance applies to money held at a bank abroad.
• Mixing exchange-rate sources across the year without a record of which you used.

The FNC angle

FNC helps you decide which part of your currency plan belongs in the US and which belongs abroad. For the foreign part, we look at jurisdictions where your connection supports an account, such as a residency, a company or a planned move, and at banks that fit that purpose. One of FNC's completed engagements was a Georgian private bank account within 14 days for an EU citizen. Every bank reviews a US applicant on that applicant's own profile, so the case is an example of the work, not a timeline for yours. Your CPA handles the reporting and any currency gains.