Surely this is not true? It doesn't seem consistent with the IRS's guidance [1], anyway. You would simply value the expense in USD at the time of the transaction. There is no capital gain or loss.

[1]: https://www.irs.gov/individuals/international-taxpayers/fore...

Any time you "realize" a currency or commodity (that is, sell it or trade it for something else) you need to pay tax on the capital gain, if there is one. At some point, you purchased those CAD. If the value of CAD is higher when you use it to pay for your coffee, there was a capital gain, and you just realized it.

Say you purchased X amount of CAD a few years back for $0.70 USD. It doesn't matter how much you purchased.

Now some time goes by, and the current market rate for CAD is $1.00 USD. You go ahead and purchase your $5 CAD coffee. By doing that, you've realized $5 CAD of your investment, which is currently worth $5 USD, but when you bought it it was only worth $3.50 USD. So you made a capital gain of $1.50, and you have to report and pay tax on that.

Whether you purchased a coffee or converted to USD doesn't matter -- the important part is that you made a gain on the CAD over time, then used it for something.

I did not realise you were assuming that the taxpayer already held the CAD for some period of time before the coffee purchase. So US tax law provides no exception for trivial capital gains on personal use assets? Clearly it makes sense to bring forex gains and losses to account when dealing with large transactions and investments expected to produce a return (eg. cryptocurrency). But in my country, a small balance in a foreign bank account held for the purpose of personal expenditure while in that country would not be regarded as a capital asset where every transaction is taxable.

From what I read elsewhere the threshold for reporting is $200 of gains.