foreign currency gains/losses unavoidable?

dontworryaboutit

Im a US LLC so my home-currency is USD.

If I have foreign-currency activity without converting to USD will I always have gains/losses? Let me explain:

Say I have a GST liability account (CAD). I make a sale in Feb and collect $1000 GST. The CAD/USD exchange is 0.80 so my balance sheet will show a GST liability of $800 USD. On Apr I remit this $1000 GST to the CRA, but the CAD/USD exchange is now 0.70 so my GST liability is now $100 USD. I'd have to DR GST liability $100 & CR curreny gain $100 and pay tax on it.

In this scenario, I recieved and remitted $1000 CAD to the CRA. I am being taxed on a gain I never realized. Is this simply unavoidable for transacting in foreign currency?

Barsin

Hey there @dontworryaboutit

Let me start by apologizing for the major delay in this response some of our community support staff actually needed hop on a zoom call to workshop this particular post as there seem to be a lot of moving parts. I was hoping I could break this down based on the initial questions in your post:

If I have foreign-currency activity without converting to USD will I always have gains/losses?
The short answer is yes.

When a foreign currency bank account reaches a zero balance in the foreign currency, there is usually a home currency balance in the account, due to foreign exchange rate fluctuations over time as transactions are recorded. If you zero out the balance in the business currency by creating a journal entry (the other side is gain/loss on foreign exchange), Wave calculates a corresponding foreign currency amount which is then recorded into the balance of the account. This means that ultimately, either the account will show a business currency balance (which is a 'phantom' account balance on the balance sheet), or the account will hold a foreign currency balance (which doesn't appear on the balance sheet, but then the bank account can't be reconciled as there is a 'phantom' transaction in the foreign currency).

In other words, if I create an invoice, bill, or liability today, Wave imports the exchange rate for the day that the transaction was created imported using XE.com. If the invoice, bill or liability is paid days, weeks or even months later, then wave will create a new transaction imported from XE.com for the day that it was marked paid. This amount may differ from the initial incurred expense/income/liability creating a difference in exchange rates which will result in a balance.

We're working to make it possible for you to be able to update the business currency balance of a foreign currency bank account without also creating a foreign currency transaction amount. This would prevent your balance sheet and/or the account to have a phantom amount.

I am being taxed on a gain I never realized. Is this simply unavoidable for transacting in foreign currency?
You'll want to keep track of all of your foreign transactions using other international accounts in order to keep track of your unrealized loss or gain and ensure that you're able to manually keep track of the taxes paid here. It's best to discuss this with a CPA if possible.

The Workaround
If you create a journal transaction moving your funds to debit the loss/gain account and credit your foreign currency account, you can debit the losses here. Keep in mind however, the journal transaction will be in your native currency (USD). This means that you'll need to head to XE.com, find the exchange rate USD > CAD and enter in the amount in USD in order to zero out the CAD balance.

I hope this makes sense but please don't hesitate to reach out for more info!