26 USC 988 - Treatment of certain foreign currency transactions

View all text of Subpart J [§ 985 - § 989]

§ 988. Treatment of certain foreign currency transactions

(a) General ruleNotwithstanding any other provision of this chapter—

(1) Treatment as ordinary income or loss

(A) In general

(B) Special rule for forward contracts, etc.

(2) Gain or loss treated as interest for certain purposes

(3) Source

(A) In general

(B) ResidenceFor purposes of this subpart—

(i) In generalThe residence of any person shall be—(I) in the case of an individual, the country in which such individual’s tax home (as defined in section 911(d)(3)) is located,(II) in the case of any corporation, partnership, trust, or estate which is a United States person (as defined in section 7701(a)(30)), the United States, and(III) in the case of any corporation, partnership, trust, or estate which is not a United States person, a country other than the United States.

If an individual does not have a tax home (as so defined), the residence of such individual shall be the United States if such individual is a United States citizen or a resident alien and shall be a country other than the United States if such individual is not a United States citizen or a resident alien.

(ii) Exception

(iii) Special rule for partnerships

(C) Special rule for certain related party loansExcept to the extent provided in regulations, in the case of a loan by a United States person or a related person to a 10-percent owned foreign corporation which is denominated in a currency other than the dollar and bears interest at a rate at least 10 percentage points higher than the Federal mid-term rate (determined under section 1274(d)) at the time such loan is entered into, the following rules shall apply:

(i) For purposes of section 904 only, such loan shall be marked to market on an annual basis.

(ii) Any interest income earned with respect to such loan for the taxable year shall be treated as income from sources within the United States to the extent of any loss attributable to clause (i).

For purposes of this subparagraph, the term “related person” has the meaning given such term by section 954(d)(3), except that such section shall be applied by substituting “United States person” for “controlled foreign corporation” each place such term appears.

(D) 10-percent owned foreign corporation

(b) Foreign currency gain or lossFor purposes of this section—

(1) Foreign currency gain

(2) Foreign currency loss

(3) Special rule for certain contracts, etc.

(1) Section 988 transaction

(A) In generalThe term “section 988 transaction” means any transaction described in subparagraph (B) if the amount which the taxpayer is entitled to receive (or is required to pay) by reason of such transaction—

(i) is denominated in terms of a nonfunctional currency, or

(ii) is determined by reference to the value of 1 or more nonfunctional currencies.

(B) Description of transactionsFor purposes of subparagraph (A), the following transactions are described in this subparagraph:

(i) The acquisition of a debt instrument or becoming the obligor under a debt instrument.

(ii) Accruing (or otherwise taking into account) for purposes of this subtitle any item of expense or gross income or receipts which is to be paid or received after the date on which so accrued or taken into account.

(iii) Entering into or acquiring any forward contract, futures contract, option, or similar financial instrument.

The Secretary may prescribe regulations excluding from the application of clause (ii) any class of items the taking into account of which is not necessary to carry out the purposes of this section by reason of the small amounts or short periods involved, or otherwise.

(i) In generalIn the case of any disposition of any nonfunctional currency—(I) such disposition shall be treated as a section 988 transaction, and(II) any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).

(ii) Nonfunctional currency

(D) Exception for certain instruments marked to market

(i) In general

(ii) Election out(I) In general(II) Time for making election(III) Special rule for partnerships, etc.

(iii) Treatment of certain partnerships

(E) Special rules for certain funds

(i) In general

(ii) Special rule where electing partnership does not qualify

(iii) Qualified fund definedFor purposes of this subparagraph, the term “qualified fund” means any partnership if—(I) at all times during the taxable year (and during each preceding taxable year to which an election under subclause (V) applied), such partnership has at least 20 partners and no single partner owns more than 20 percent of the interests in the capital or profits of the partnership,(II) the principal activity of such partnership for such taxable year (and each such preceding taxable year) consists of buying and selling options, futures, or forwards with respect to commodities,(III) at least 90 percent of the gross income of the partnership for the taxable year (and for each such preceding taxable year) consisted of income or gains described in subparagraph (A), (B), or (G) of section 7704(d)(1) or gain from the sale or disposition of capital assets held for the production of interest or dividends,(IV) no more than a de minimis amount of the gross income of the partnership for the taxable year (and each such preceding taxable year) was derived from buying and selling commodities, and(V) an election under this subclause applies to the taxable year.

An election under subclause (V) for any taxable year shall be made on or before the 1st day of such taxable year (or, if later, on or before the 1st day during such year on which the partnership holds an instrument referred to in clause (i)). Any such election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary.

(iv) Treatment of certain currency contracts(I) In general(II) Gains and losses treated as short-term

(v) Special rules for clause (iii)(I)(I) Certain general partners(II) Treatment of incentive compensation(III) Treatment of tax-exempt partners(IV) Look-thru rule

(vi) Other special rulesFor purposes of this subparagraph—(I) Related persons(II) Predecessors(III) Inadvertent terminations(IV) Treatment of certain debt instruments

(2) Booking dateThe term “booking date” means—

(A) in the case of a transaction described in paragraph (1)(B)(i), the date of acquisition or on which the taxpayer becomes the obligor, or

(B) in the case of a transaction described in paragraph (1)(B)(ii), the date on which accrued or otherwise taken into account.

(3) Payment date

(4) Debt instrument

(5) Special rules where taxpayer takes or makes delivery

(d) Treatment of 988 hedging transactions

(1) In general

(2) 988 hedging transactionFor purposes of paragraph (1), the term “988 hedging transaction” means any transaction—

(A) entered into by the taxpayer primarily—

(i) to manage risk of currency fluctuations with respect to property which is held or to be held by the taxpayer, or

(ii) to manage risk of currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer, and

(B) identified by the Secretary or the taxpayer as being a 988 hedging transaction.

(e) Application to individuals

(1) In general

(2) Exclusion for certain personal transactionsIf—

(A) nonfunctional currency is disposed of by an individual in any transaction, and

(B) such transaction is a personal transaction,

no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200.

(3) Personal transactionsFor purposes of this subsection, the term “personal transaction” means any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of—

(A) section 162 (other than traveling expenses described in subsection (a)(2) thereof), or

(B) section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).

(Added Pub. L. 99–514, title XII, § 1261(a), Oct. 22, 1986, 100 Stat. 2587; amended Pub. L. 100–647, title I, § 1012(v)(2)(A), (3), (4), (6)–(8), title VI, § 6130(a), (b), Nov. 10, 1988, 102 Stat. 3529, 3530, 3717; Pub. L. 101–239, title VII, § 7811(i)(7), Dec. 19, 1989, 103 Stat. 2410; Pub. L. 103–66, title XIII, § 13223(b)(1), Aug. 10, 1993, 107 Stat. 484; Pub. L. 105–34, title XI, § 1104(a), Aug. 5, 1997, 111 Stat. 967; Pub. L. 106–170, title V, § 532(b)(3), Dec. 17, 1999, 113 Stat. 1930.)