Tax on currency exchange rate income

[KWF]

A taxpayer invests in a foreign government oid bond at a certain currency exchange rate.

Years later when the bond matures, the taxpayer realizes income not only from the bond interest, but also from a better currency exchange rate.

Is the currency exchange portion of the income taxed as ordinary income (similar to the bond interest portion), or as capital gain?

[Koss]

Bond Value

Seems like capital gain to me. It could have gone the other way, and he would have had a capital loss.

The dynamics of the transaction are very similar to what happens when you sell the bond before maturity. Due to interest rate fluctuations, the bond is often sold at a premium or a discount, i.e., more or less than the face value. That also gives rise to capital gain or loss, even where there is no foreign currency involved.

BMK