J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

36.12 Exchange Rates and Blocked Currency

Income reported on your federal income tax return must be stated in U.S. dollars. Where you are paid in foreign currency, you report your pay in U.S. dollars on the basis of the exchange rates prevailing at the time the income is actually or constructively received. You use the rate that most closely reflects the value of the foreign currency—the official rate, the open market rate, or any other relevant rate. Be prepared to justify the rate you use.

Fulbright grants.

If 70% or more of a Fulbright grant is paid in nonconvertible foreign currency, U.S. tax may be paid in the foreign currency. See IRS Publication 54 for details.

Blocked currency.

A citizen or resident alien may be paid in a foreign currency that cannot be converted into American dollars and removed from the foreign country. If your income is in blocked currency, you may elect to defer the reporting of that income until: (1) the currency becomes convertible into dollars, (2) you actually convert it into dollars, or (3) you use it for personal expenses. Purchase of a business or investment in the foreign country is not the kind of use that is treated as a conversion. (4) You make a gift of it or leave it in your will. (5) You are a resident alien and you give up your U.S. residence.

If you use this method to defer the income, you may not deduct the expenses of earning it until you report it. You must continue to use this method after you choose it. You may only change with ...