[gsb]

The parent may have been confused about when a transaction takes place. They would only have a taxable event for their currency at the time they converted between different currencies. However, the advice you give about calculating capital gain in foreign currency is VERY bad. You may have been given bad advice. In particular, the IRS helplines are completely inaccurate for issues arising from foreign residence. If you get a personal letter ruling then their advice is binding. Advice over the phone is not binding.

For a US citizen, the functional currency for personal taxation is ALWAYS the US dollar. See particularly points 12 and 13 of http://openjurist.org/93/f3d/26/quijano-v-united-states

Basis must always be converted to US dollars using the exchange rate at the time of purchase, and sale price likewise converted to US dollars using the exchange rate at the time of sale. The US capital gain is then the difference between these two US dollar values.

This can easily (and frequently does) lead to having to pay a capital gain on a transaction that lost money in the currency in which it actually took place. Particularly the last decade was bad for this with the falling US dollar.

Many expats (if they are aware of their obligation to worldwide taxation which most are not) may calculate this incorrectly. This will often be ignored by the IRS, because they have no matching information to use to flag the foreign transaction for audit. However, with FATCA coming, the IRS will finally get some matching information and it is a strong possibility for nasty surprises in the future.