How does multi-currency bookkeeping work?
The books are kept in US dollars. Each transaction in another currency, such as a euro invoice or a pound expense, is recorded in that currency and converted at the exchange rate on the transaction date. Accounting software with multi-currency features does this automatically with daily rates. See QuickBooks vs Xero vs Wave.
What does an example look like?
| Event | Rate | US dollars |
|---|---|---|
| Invoice a client €10,000 on March 1 | 1.08 | $10,800 income and receivable |
| Client pays €10,000 on April 10 | 1.10 | $11,000 received |
| Difference | $200 realized foreign exchange gain |
The income is $10,800, recorded when invoiced; the extra $200 arises from the currency movement, not from the sale. Under the cash method for tax, income is measured when received, but the books still benefit from tracking the gain separately.
How are foreign currency balances handled?
Keep a separate account in the books for each currency balance, such as a euro balance with a multi-currency provider. At month end, revalue it at the closing rate; the change is an unrealized gain or loss in the books. When the money is converted to dollars, the gain or loss becomes realized. See receiving international payments.
Treat a transfer between your own currency balances as a conversion, not as income or an expense.
How do you set it up?
Set the home currency to US dollars
In the accounting software.
Enable the currencies you use
And create an account for each foreign balance.
Use the original currency
For invoices and bills; the software converts them.
Record conversion fees separately
As bank fees, not part of the gain or loss.
Revalue at month end
And review the gains and losses.
Check each month that the software's balance in each currency matches the provider's statement.
How are currency gains taxed?
Realized gains and losses on foreign currency transactions of a business, such as receivables, payables and currency balances, are generally ordinary income or loss. Unrealized revaluations in the books are usually not taxed until realized. Keep a record of the rates used.
Non-business currency gains, such as on personal savings held abroad, follow different rules, so keep business and personal balances separate.
What about US reporting?
US tax returns and Form 5472 are completed in US dollars. Report amounts at the rates used in the books, or follow the form instructions where they allow yearly average rates, and apply the method consistently. A US LLC with foreign accounts above $10,000 in total may also need an FBAR. See Form 5472 and FBAR vs Form 8938.
Keep a note of the rate source used, such as your bank or the accounting software's daily feed.
What are the common mistakes?
- Recording foreign receipts at the amount that landed in the dollar account, losing the fees and exchange difference.
- Using one rate for the whole year in the books when amounts are large or rates moved sharply.
- Mixing conversion fees into the exchange gain or loss.
- Leaving foreign currency balances unrecorded because they are held with a payment provider.
Should you invoice in dollars or in the client's currency?
Invoicing in dollars removes currency risk from your books; invoicing in the client's currency may help win work but leaves you exposed. Either way, agree in the contract who bears bank and conversion charges.
Paid in several currencies?
We set up multi-currency books, record every transaction at the right rate, and handle foreign exchange gains and your US reporting.
Questions people ask
What currency should a US LLC keep its books in?
US dollars, its functional currency, with foreign transactions converted at the transaction-date rate.
What is a realized foreign exchange gain?
The difference when money is converted or an invoice is paid at a different rate from the one originally recorded.
Are foreign exchange gains taxable?
Realized gains on business currency transactions are generally ordinary income; losses are generally ordinary losses.
Do I report Form 5472 in US dollars?
Yes. Convert at the rates used in your books, or as the instructions allow, applied consistently.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- IRS: Yearly average currency exchange rates
- IRS: Foreign currency and currency exchange rates
- IRS: Instructions for Form 5472 (Rev. December 2024)
Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.
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This guide is general information. It is not tax or legal advice for your situation.