The Treasury Regulations to section 988 (the section that controls the taxation of currency exchanges) deal with that issue. For those of us in the US, the dinar is considered "nonfunctional" currency (our dollar is our "functional" currency). The reg states, in part: (iii) Coordination with section 988©(1)©(ii). No exchange gain or loss is recognized with respect to the following transactions-- (A) An exchange of units of nonfunctional currency for different units of the same nonfunctional currency; Thus, the exchange of larger denominations of IQD for smalller denominations of IQD would not be a taxable event. The bigger question is whether we can enjoy capital gain treatment under 988 at all (regardless of how long the IQD were held). Something I am looking into now.