Say a US citizen buys a house in the UK and takes out a £400,000 mortgage to pay for it and at the time, £400,000=$500,000 USD.
Now 3 years later, they want to refinance the £400k mortgage they owe with a different lender but the currency exchange rates have fluctuated and now £400,000=$550,000.
In the eyes of the US, they immediately owe capital gains tax on $50,000 even though nothing happened and they didn't even move out of the house.
So yes, the US charges CGT on foreign currency and equivalents.
Refinancing a mortgage doesn't trigger capital gains tax.
Capital gains tax applies when you sell an asset, like a house.
While currency fluctuations do play a role, you calculate the gain or loss at the time of sale, not when refinancing. You'd compare the USD value of your purchase price to the USD value of your selling price.
Yes, you're right, gains in USD terms when refinancing a mortgage denominated in another currency are taxable.
Interestingly, such gains aren't taxable at the (usually lower) capital gains tax rate, but they're taxable at the (usually higher) regular income tax rate.
Seems like it would be wise for Americans living abroad to get USD-termed mortgages ("Foreign Currency Mortgage" as far as the UK lender is concerned).
Now 3 years later, they want to refinance the £400k mortgage they owe with a different lender but the currency exchange rates have fluctuated and now £400,000=$550,000.
In the eyes of the US, they immediately owe capital gains tax on $50,000 even though nothing happened and they didn't even move out of the house.
So yes, the US charges CGT on foreign currency and equivalents.