Does favorable currency exchange constitute income for U.S. income tax purposes?
I've had a British bank account in addition to my American one since 1987. (I lived in England from 1987 to 1990.) Between 2000 to 2002, I moved a lot of money from my American account to my British account because the currency exchange rate dropped to around $1.39 per pound at its lowest. I moved the money in half a dozen separate moves over those two years where I sent a check drawn on my American account (in dollars) and told my British bank to convert it to pounds and deposit it in my account with them. The conversion rates at which these amounts were converted probably were about $1.43 to $1.58 per pound. I moved the money because I knew I would be spending some money eventually on things like travel in the U.K. and membership in British organizations and I wanted to convert the money when the currency exchange rate was at its lowest.
I have since used some of the money for things like travel and membership fees. In December of 2004, the conversion rate went up to $1.92, so I decided to move nearly all of the money in my British bank account back to the U.S. I converted it to dollars and deposited it in my American bank account. Because I moved the money to the U.K. when the currency exchange rate was around $1.43 (or whatever) and moved it back to the U.S. when the currency exchange rate was around $1.92 (or whatever), in effect I have made a couple thousand dollars on the two moves. Does this constitute a profit for the purposes of U.S. taxes? Also, I wrote my British bank to send me the check for the converted amount in 2004, but the check didn't arrive till 2005 (and hence it wasn't deposited into my American bank account till then). If this is taxable, is it taxable on my 2004 return or on my 2005 return?
(Incidentally, I only pay U.S. taxes on any of this money. The bank account was actually in Jersey in the Channel Islands, where it's not necessary to pay British taxes. I don't pay British taxes on interest on the account. I do pay American taxes on the interest on the account.)