§988 — Treatment of certain foreign currency transactions
56 citing cases
Statute Text — 26 U.S.C. §988
Notwithstanding any other provision of this chapter—
Except as otherwise provided in this section, any foreign currency gain or loss attributable to a section 988 transaction shall be computed separately and treated as ordinary income or loss (as the case may be).
Except as provided in regulations, a taxpayer may elect to treat any foreign currency gain or loss attributable to a forward contract, a futures contract, or option described in subsection (c)(1)(B)(iii) which is a capital asset in the hands of the taxpayer and which is not a part of a straddle (within the meaning of section 1092(c), without regard to paragraph (4) thereof) as capital gain or loss (as the case may be) if the taxpayer makes such election and identifies such transaction before the close of the day on which such transaction is entered into (or such earlier time as the Secretary may prescribe).
To the extent provided in regulations, any amount treated as ordinary income or loss under paragraph (1) shall be treated as interest income or expense (as the case may be).
Except as otherwise provided in regulations, in the case of any amount treated as ordinary income or loss under paragraph (1) (without regard to paragraph (1)(B)), the source of such amount shall be determined by reference to the residence of the taxpayer or the qualified business unit of the taxpayer on whose books the asset, liability, or item of income or expense is properly reflected.
For purposes of this subpart—
The residence of any person shall be—
in the case of an individual, the country in which such individual’s tax home (as defined in section 911(d)(3)) is located,
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
in the case of any corporation, partnership, trust, or estate which is not a United States person, a country other than the United States.
In the case of a qualified business unit of any taxpayer (including an individual), the residence of such unit shall be the country in which the principal place of business of such qualified business unit is located.
To the extent provided in regulations, in the case of a partnership, the determination of residence shall be made at the partner level.
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.
Except 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:
For purposes of section 904 only, such loan shall be marked to market on an annual basis.
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.
The term “10-percent owned foreign corporation” means any foreign corporation in which the United States person owns directly or indirectly at least 10 percent of the voting stock.
For purposes of this section—
The term “foreign currency gain” means any gain from a section 988 transaction to the extent such gain does not exceed gain realized by reason of changes in exchange rates on or after the booking date and before the payment date.
The term “foreign currency loss” means any loss from a section 988 transaction to the extent such loss does not exceed the loss realized by reason of changes in exchange rates on or after the booking date and before the payment date.
In the case of any section 988 transaction described in subsection (c)(1)(B)(iii), any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).
For purposes of this section—
The 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—
is denominated in terms of a nonfunctional currency, or
is determined by reference to the value of 1 or more nonfunctional currencies.
For purposes of subparagraph (A), the following transactions are described in this subparagraph:
The acquisition of a debt instrument or becoming the obligor under a debt instrument.
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.
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.
In the case of any disposition of any nonfunctional currency—
such disposition shall be treated as a section 988 transaction, and
any gain or loss from such transaction shall be treated as foreign currency gain or loss (as the case may be).
For purposes of this section, the term “nonfunctional currency” includes coin or currency, and nonfunctional currency denominated demand or time deposits or similar instruments issued by a bank or other financial institution.
Clause (iii) of subparagraph (B) shall not apply to any regulated futures contract or nonequity option which would be marked to market under section 1256 if held on the last day of the taxable year.
The taxpayer may elect to have clause (i) not apply to such taxpayer. Such an election shall apply to contracts held at any time during the taxable year for which such election is made or any succeeding taxable year unless such election is revoked with the consent of the Secretary.
Except as provided in regulations, an election under subclause (I) 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 taxpayer holds a contract described in clause (i)).
In the case of a partnership, an election under subclause (I) shall be made by each partner separately. A similar rule shall apply in the case of an S corporation.
This subparagraph shall not apply to any income or loss of a partnership for any taxable year if such partnership made an election under subparagraph (E)(iii)(V) for such year or any preceding year.
In the case of a qualified fund, clause (iii) of subparagraph (B) shall not apply to any instrument which would be marked to market under section 1256 if held on the last day of the taxable year (determined after the application of clause (iv)).
If any partnership made an election under clause (iii)(V) for any taxable year and such partnership has a net loss for such year or any succeeding year from instruments referred to in clause (i), the rules of clauses (i) and (iv) shall apply to any such loss year whether or not such partnership is a qualified fund for such year.
For purposes of this subparagraph, the term “qualified fund” means any partnership if—
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,
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,
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,
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
an election under this subclause applies to the taxable year.
Except as provided in regulations, in the case of a qualified fund, any bank forward contract, any foreign currency futures contract traded on a foreign exchange, or to the extent provided in regulations any similar instrument, which is not otherwise a section 1256 contract shall be treated as a section 1256 contract for purposes of section 1256.
In the case of any instrument treated as a section 1256 contract under subclause (I), subparagraph (A) of section 1256(a)(3) shall be applied by substituting “100 percent” for “40 percent” (and subparagraph (B) of such section shall not apply).
The interest of a general partner in the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) for any taxable year of the partnership if, for the taxable year of the partner in which such partnership taxable year ends, such partner (and each corporation filing a consolidated return with such partner) had no ordinary income or loss from a section 988 transaction which is foreign currency gain or loss (as the case may be).
For purposes of clause (iii)(I), any income allocable to a general partner as incentive compensation based on profits rather than capital shall not be taken into account in determining such partner’s interest in the profits of the partnership.
Except as provided in regulations, the interest of a partner in the partnership shall not be treated as failing to meet the 20-percent ownership requirements of clause (iii)(I) if none of the income of such partner from such partnership is subject to tax under this chapter (whether directly or through 1 or more pass-thru entities).
In determining whether the requirements of clause (iii)(I) are met with respect to any partnership, except to the extent provided in regulations, any interest in such partnership held by another partnership shall be treated as held proportionately by the partners in such other partnership.
For purposes of this subparagraph—
Interests in the partnership held by persons related to each other (within the meaning of sections 267(b) and 707(b)) shall be treated as held by 1 person.
References to any partnership shall include a reference to any predecessor thereof.
Rules similar to the rules of section 7704(e) shall apply.
For purposes of clause (iii)(IV), any debt instrument which is a section 988 transaction shall be treated as a commodity.
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.
The term “booking date” means—
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
in the case of a transaction described in paragraph (1)(B)(ii), the date on which accrued or otherwise taken into account.
The term “payment date” means the date on which the payment is made or received.
The term “debt instrument” means a bond, debenture, note, or certificate or other evidence of indebtedness. To the extent provided in regulations, such term shall include preferred stock.
If the taxpayer takes or makes delivery in connection with any section 988 transaction described in paragraph (1)(B)(iii), any gain or loss (determined as if the taxpayer sold the contract, option, or instrument on the date on which he took or made delivery for its fair market value on such date) shall be recognized in the same manner as if such contract, option, or instrument were so sold.
To the extent provided in regulations, if any section 988 transaction is part of a 988 hedging transaction, all transactions which are part of such 988 hedging transaction shall be integrated and treated as a single transaction or otherwise treated consistently for purposes of this subtitle. For purposes of the preceding sentence, the determination of whether any transaction is a section 988 transaction shall be determined without regard to whether such transaction would otherwise be marked-to-market under section 475 or 1256 and such term shall not include any transaction with respect to which an election is made under subsection (a)(1)(B). Sections 475, 1092, and 1256 shall not apply to a transaction covered by this subsection.
For purposes of paragraph (1), the term “988 hedging transaction” means any transaction—
entered into by the taxpayer primarily—
to manage risk of currency fluctuations with respect to property which is held or to be held by the taxpayer, or
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
identified by the Secretary or the taxpayer as being a 988 hedging transaction.
The preceding provisions of this section shall not apply to any section 988 transaction entered into by an individual which is a personal transaction.
If—
nonfunctional currency is disposed of by an individual in any transaction, and
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.
For 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—
section 162 (other than traveling expenses described in subsection (a)(2) thereof), or
section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).
Treasury Regulations
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Treas. Reg. §1.988-0Taxation of gain or loss from a section 988 transaction; Table of Contents
This section lists captioned paragraphs contained in §§ 1.988-1 through 1.988-6.
(a) Section 988 transaction.
(1) In general.
(2) Description of transactions.
(3) [Reserved]
(4) Treatment of assets and liabilities of a section 987 aggregate partnership or DE that are not attributed to an eligible QBU.
(5) [Reserved]
(6) Examples.
(7) Special rules for regulated futures contracts and non-equity options.
(8) Special rules for qualified funds.
(9) Exception for certain transactions entered into by an individual.
(10) Intra-taxpayer transactions.
(11) Authority of Commissioner to include or exclude transactions from section 988.
(b) Spot contract.
(c) Nonfunctional currency.
(d) Spot rate.
(1) In general.
(2) Consistency required in valuing transactions subject to section 988.
(3) Use of certain spot rate conventions for payables and receivables denominated in nonfunctional currency.
(4) Currency where an official government established rate differs from a free market rate.
(e) Exchange gain or loss.
(f) Hyperinflationary currency.
(g) Fair market value.
(h) Interaction with sections 1092 and 1256 in examples.
(i) Effective date.
(a) Disposition of nonfunctional currency.
(1) Recognition of exchange gain or loss.
(2) Computation of exchange gain or loss.
(b) Translation of interest income or expense and determination of exchange gain or loss with respect to debt instruments.
(1) Translation of interest income received with respect to a nonfunctional currency demand account.
(2) Translation of nonfunctional currency interest income or expense received or paid with respect to a debt instrument described in § 1.988-1(a)(1)(ii) and (2)(i).
(3) Exchange gain or loss recognized by the holder with respect to accrued interest income.
(4) Exchange gain or loss recognized by the obligor with respect to accrued interest expense.
(5) Exchange gain or loss recognized by the holder of a debt instrument with respect to principal.
(6) Exchange gain or loss recognized by the obligor of a debt instrument with respect to principal.
(7) Payment ordering rules.
(8) Limitation of exchange gain or loss on payment or disposition of a debt instrument.
(9) Examples.
(10) Treatment of bond premium.
(11) Market discount.
(12) Tax exempt bonds.
(13) Nonfunctional currency debt exchanged for stock of obligor.
(14) [Reserved]
(15) Debt instruments and deposits denominated in hyperinflationary currencies.
(16) [Reserved]
(17) Coordination with installment method under section 453.
(18) Interaction of section 988 and § 1.1275-2(g).
(c) Item of expense or gross income or receipts which is to be paid or received after the date accrued.
(1) In general.
(2) Determination of exchange gain or loss with respect to an item of gross income or receipts.
(3) Determination of exchange gain or loss with respect to an item of expense.
(4) Examples.
(d) Exchange gain or loss with respect to forward contracts, futures contracts and option contracts.
(1) Scope.
(2) Realization of exchange gain or loss.
(3) Recognition of exchange gain or loss.
(4) Determination of exchange gain or loss.
(5) Hyperinflationary contracts.
(e) Currency swaps and notional principal contracts.
(1) Notional principal contract denominated in a single nonfunctional currency.
(2) Special rules for currency swaps.
(3) Amortization of swap premium or discount in the case of off market swaps.
(4) Treatment of taxpayer disposing of a currency swap.
(5) Examples.
(6) Special effective date for rules regarding currency swaps.
(7) Special rules for currency swap contracts in hyperinflationary currencies.
(f) Substance over form.
(1) In general.
(2) Example.
(g) Effective date.
(h) Timing of income and deductions from notional principal contracts.
(i) [Reserved]
(a) In general.
(b) Election to characterize exchange gain or loss on certain identified forward contracts, futures contracts and option contracts as capital gain or loss.
(1) In general.
(2) Special rule for contracts that become part of a straddle after the election is made.
(3) Requirements for making the election.
(4) Verification.
(5) Independent verification.
(6) Effective date.
(c) Exchange gain or loss treated as interest.
(1) In general.
(2) Exchange loss realized by the holder on nonfunctional currency tax exempt bonds.
(d) Effective date.
(a) In general.
(b) Qualified business unit.
(1) In general.
(2) Proper reflection on the books of the taxpayer or qualified business unit.
(c) Effectively connected exchange gain or loss.
(d) Residence.
(1) In general.
(2) Exception.
(3) Partner in a partnership not engaged in a U.S. trade or business under section 864(b)(2).
(e) Special rule for certain related party loans.
(1) In general.
(2) United States person.
(3) Loans by related person.
(4) 10 percent owned foreign corporation.
(f) Exchange gain or loss treated as interest under § 1.988-3.
(g) Exchange gain or loss allocated in the same manner as interest under § 1.861-9T.
(h) Effective date.
(a) Integration of a nonfunctional currency debt instrument and a § 1.988-5(a) hedge.
(1) In general.
(2) Exception.
(3) Qualifying debt instrument.
(4) Section 1.988-5(a) hedge.
(5) Definition of integrated economic transaction.
(6) Special rules for legging in and legging out of integrated treatment.
(7) Transactions part of a straddle.
(8) Identification requirements.
(9) Taxation of qualified hedging transactions.
(10) Transition rules and effective dates.
(b) Hedged executory contracts.
(1) In general.
(2) Definitions.
(3) Identification rules.
(4) Effect of hedged executory contract.
(5) References to this paragraph (b).
(c) Hedges of period between trade date and settlement date on purchase or sale of publicly traded stock or security.
(d) [Reserved]
(e) Advance rulings regarding net hedging and anticipatory hedging systems.
(f) [Reserved]
(g) General effective date.
(a) In general.
(1) Scope.
(2) Exception for hyperinflationary currencies.
(b) Instruments described in paragraph (a)(1)(i) of this section.
(1) In general.
(2) Application of noncontingent bond method.
(3) Treatment and translation of amounts determined under noncontingent bond method.
(4) Determination of gain or loss not attributable to foreign currency.
(5) Determination of foreign currency gain or loss.
(6) Source of gain or loss.
(7) Basis different from adjusted issue price.
(8) Fixed but deferred contingent payments.
(c) Examples.
(d) Multicurrency debt instruments.
(1) In general.
(2) Determination of denomination currency.
(3) Issuer/holder consistency.
(4) Treatment of payments in currencies other than the denomination currency.
(e) Instruments issued for nonpublicly traded property.
(1) Applicability.
(2) Separation into components.
(3) Treatment of components consisting of one or more noncontingent payments in the same currency.
(4) Treatment of components consisting of contingent payments.
(5) Basis different from adjusted issue price.
(6) Treatment of holder on sale, exchange, or retirement.
(f) Rules for nonfunctional currency tax exempt obligations described in § 1.1275-4(d).
(g) Effective date.
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Treas. Reg. §1.988-0(a)In general.
In general.
(1) Scope.
(2) Exception for hyperinflationary currencies.
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Treas. Reg. §1.988-0(b)Instruments described in paragraph (a)(1)(i) of this section.
Instruments described in paragraph (a)(1)(i) of this section.
(1) In general.
(2) Application of noncontingent bond method.
(3) Treatment and translation of amounts determined under noncontingent bond method.
(4) Determination of gain or loss not attributable to foreign currency.
(5) Determination of foreign currency gain or loss.
(6) Source of gain or loss.
(7) Basis different from adjusted issue price.
(8) Fixed but deferred contingent payments.
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Treas. Reg. §1.988-0(c)Examples.
Examples.
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Treas. Reg. §1.988-0(d)Multicurrency debt instruments.
Multicurrency debt instruments.
(1) In general.
(2) Determination of denomination currency.
(3) Issuer/holder consistency.
(4) Treatment of payments in currencies other than the denomination currency.
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Treas. Reg. §1.988-0(e)Instruments issued for nonpublicly traded property.
Instruments issued for nonpublicly traded property.
(1) Applicability.
(2) Separation into components.
(3) Treatment of components consisting of one or more noncontingent payments in the same currency.
(4) Treatment of components consisting of contingent payments.
(5) Basis different from adjusted issue price.
(6) Treatment of holder on sale, exchange, or retirement.
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Treas. Reg. §1.988-0(f)Rules for nonfunctional currency tax exempt obligations described in § 1.
Rules for nonfunctional currency tax exempt obligations described in § 1.1275-4(d).
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Treas. Reg. §1.988-0(g)Effective date.
Effective date.
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Treas. Reg. §1.988-0(h)Effective date.
Effective date.
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Treas. Reg. §1.988-0(i)§1.988-0(i)
[Reserved]
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Treas. Reg. §1.988-1Certain definitions and special rules
(a) Section 988 transaction—(1) In general. The term “section 988 transaction” means any of the following transactions—
(i) A disposition of nonfunctional currency as defined in paragraph (c) of this section;
(ii) Any transaction described in paragraph (a)(2) of this section if any amount which the taxpayer is entitled to receive or is required to pay by reason of such transaction is denominated in terms of a nonfunctional currency or is determined by reference to the value of one or more nonfunctional currencies.
A transaction described in this paragraph (a) need not require or permit payment with a nonfunctional currency as long as any amount paid or received is determined by reference to the value of one or more nonfunctional currencies. The acquisition of nonfunctional currency is treated as a section 988 transaction for purposes of establishing the taxpayer's basis in such currency and determining exchange gain or loss thereon.
(2) Description of transactions. The following transactions are described in this paragraph (a)(2).
(i) Debt instruments. Acquiring a debt instrument or becoming an obligor under a debt instrument. The term “debt instrument” means a bond, debenture, note, certificate or other evidence of indebtedness.
(ii) Payables, receivables, etc. Accruing, or otherwise taking into account, for purposes of subtitle A of the Internal Revenue Code, 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. A payable relating to cost of goods sold, or a payable or receivable relating to a capital expenditure or receipt, is within the meaning of this paragraph (a)(2)(ii). Generally, a payable relating to foreign taxes (whether or not claimed as a credit under section 901) is within the meaning of this paragraph (a)(2)(ii). However, a payable of a domestic person relating to accrued foreign taxes of its qualified business unit (QBU branch) is not within the meaning of this paragraph (a)(2)(ii) if the QBU branch's functional currency is the U.S. dollar and the foreign taxes are claimed as a credit under section 901.
(iii) Forward contract, futures contract, option contract, or similar financial instrument. Except as otherwise provided in this paragraph (a)(2)(iii) and paragraph (a)(4)(i) of this section, entering into or acquiring any forward contract, futures contract, option, warrant, or similar financial instrument.
(A) Limitation for certain derivative instruments. A forward contract, futures contract, option, warrant, or similar financial instrument is within this paragraph (a)(2)(iii) only if the underlying property to which the instrument ultimately relates is a nonfunctional currency or is otherwise described in paragraph (a)(1)(ii) of this section. Thus, if the underlying property of an instrument is another financial instrument (e.g., an option on a futures contract), then the underlying property to which such other instrument (e.g., the futures contract) ultimately relates must be a nonfunctional currency. For example, a forward contract to purchase wheat denominated in a nonfunctional currency, an option to enter into a forward contract to purchase wheat denominated in a nonfunctional currency, or a warrant to purchase stock denominated in a nonfunctional currency is not described in this paragraph (a)(2)(iii). On the other hand, a forward contract to purchase a nonfunctional currency, an option to enter into a forward contract to purchase a nonfunctional currency, an option to purchase a bond denominated in or the payments of which are determined by reference to the value of a nonfunctional currency, or a warrant to purchase nonfunctional currency is described in this paragraph (a)(2)(iii).
(B) Nonfunctional currency notional principal contracts—(1) In general. The term “similar financial instrument” includes a notional principal contract only if the payments required to be made or received under the contract are determined with reference to a nonfunctional currency.
(2) Definition of notional principal contract. The term “notional principal contract” means a contract (e.g., a swap, cap, floor or collar) that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts. For this purpose, a “notional principal contract” shall only include an instrument where the underlying property to which the instrument ultimately relates is money (e.g., functional currency), nonfunctional currency, or property the value of which is determined by reference to an interest rate. Thus, the term “notional principal contract” includes a currency swap as defined in § 1.988-2(e)(2)(ii), but does not include a swap referenced to a commodity or equity index.
(C) Effective date with respect to certain contracts. This paragraph (a)(2)(iii) does not apply to any forward contract, futures contract, option, warrant, or similar financial instrument entered into or acquired on or before October 21, 1988, if such instrument would have been marked to market under section 1256 if held on the last day of the taxable year.
(3) [Reserved] For further guidance, see § 1.988-1T(a)(3).
(4)-(5) {Reserved]
(6) Examples. The following examples illustrate the application of paragraph (a) of this section. The examples assume that X is a U.S. corporation on an accrual method with the calendar year as its taxable year. Because X is a U.S. corporation the U.S. dollar is its functional currency under section 985. The examples also assume that section 988(d) does not apply.
(7) Special rules for regulated futures contracts and non-equity options—(i) In general. Except as provided in paragraph (a)(7)(ii) of this section, paragraph (a)(2)(iii) of this section shall not apply to any regulated futures contract or non-equity option which would be marked to market under section 1256 if held on the last day of the taxable year.
(ii) Election to have paragraph (a)(2)(iii) of this section apply. Notwithstanding paragraph (a)(7)(i) of this section, a taxpayer may elect to have paragraph (a)(2)(iii) of this section apply to regulated futures contracts and non-equity options as provided in paragraphs (a)(7)(iii) and (iv) of this section.
(iii) Procedure for making the election. A taxpayer shall make the election provided in paragraph (a)(7)(ii) of this section by sending to the Internal Revenue Service Center, Examination Branch, Stop Number 92, Kansas City, MO 64999 a statement titled “Election to Treat Regulated Futures Contracts and Non-Equity Options as Section 988 Transactions Under Section 988 (c)(1)(D)(ii)” that contains the following:
(A) The taxpayer's name, address, and taxpayer identification number;
(B) The date the notice is mailed or otherwise delivered to the Internal Revenue Service Center;
(C) A statement that the taxpayer (including all members of such person's affiliated group as defined in section 1504 or in the case of an individual all persons filing a joint return with such individual) elects to have section 988(c)(1)(D)(i) and § 1.988-1(a)(7)(i) not apply;
(D) The date of the beginning of the taxable year for which the election is being made;
(E) If the election is filed after the first day of the taxable year, a statement regarding whether the taxpayer has previously held a contract described in section 988(c)(1)(D)(i) or § 1.988-1(a)(7)(i) during such taxable year, and if so, the first date during the taxable year on which such contract was held; and
(F) The signature of the person making the election (in the case of individuals filing a joint return, the signature of all persons filing such return).
The election shall be made by the following persons: in the case of an individual, by such individual; in the case of a partnership, by each partner separately; effective for taxable years beginning after March 17, 1992, in the case of tiered partnerships, each ultimate partner; in the case of an S corporation, by each shareholder separately; in the case of a trust (other than a grantor trust) or estate, by the fiduciary of such trust or estate; in the case of any corporation other than an S corporation, by such corporation (in the case of a corporation that is a member of an affiliated group that files a consolidated return, such election shall be valid and binding only if made by the common parent, as that term is used in § 1.1502-77(a)); in the case of a controlled foreign corporation, by its controlling United States shareholders under § 1.964-1(c)(3). With respect to a corporation (other than an S corporation), the election, when made by the common parent, shall be binding on all members of such corporation's affiliated group as defined in section 1504 that file a consolidated return. The election shall be binding on any income or loss derived from the partner's share (determined under the principles of section 702(a)) of all contracts described in section 988(c)(1)(D)(i) or paragraph (a)(7)(i) of this section in which the taxpayer holds a direct interest or indirect interest through a partnership or S corporation; however, the election shall not apply to any income or loss of a partnership for any taxable year if such partnership made an election under section 988(c)(1)(E)(iii)(V) for such year or any preceding year. Generally, a copy of the election must be attached to the taxpayer's income tax return for the first year it is effective. It is not required to be attached to subsequent returns. However, in the case of a partner, a copy of the election must be attached to the taxpayer's income tax return for every year during which the taxpayer is a partner in a partnership that engages in a transaction that is subject to the election.
(iv) Time for making the election—(A) In general. Unless the requirements for making a late election described in paragraph (a)(7)(iv)(B) of this section are satisfied, an election under section 988 (c)(1)(D)(ii) and paragraph (a)(7)(ii) of this section for any taxable year shall be made on or before the first day of the taxable year or, if later, on or before the first day during such taxable year on which the taxpayer holds a contract described in section 988(c)(1)(D)(ii) and paragraph (a)(7)(ii) of this section. The election under section 988(c)(1)(D)(ii) and paragraph (a)(7)(ii) of this section shall apply to contracts entered into or acquired after October 21, 1988, and held on or after the effective date of the election. The election shall be effective as of the beginning of the taxable year and shall be binding with respect to all succeeding taxable years unless revoked with the prior consent of the Commissioner. In determining whether to grant revocation of the election, recapture of the tax benefit derived from the election in previous taxable years will be considered.
(B) Late elections. A taxpayer may make an election under section 988(c)(1)(D)(ii) and paragraph (a)(7)(ii) of this section within 30 days after the time prescribed in the first sentence of paragraph (a)(7)(iv)(A) of this section. Such a late election shall be effective as of the beginning of the taxable year; however, any losses recognized during the taxable year with respect to contracts described in section 988(c)(1)(D)(ii) or paragraph (a)(7)(ii) of this section which were entered into or acquired after October 21, 1988, and held on or before the date on which the late election is mailed or otherwise delivered to the Internal Revenue Service Center shall not be treated as derived from a section 988 transaction. A late election must comply with the procedures set forth in paragraph (a)(7)(iii) of this section.
(v) Transition rule. An election made prior to September 21, 1989 which satisfied the requirements of Notice 88-124, 1988-51 I.R.B. 6, shall be deemed to satisfy the requirements of paragraphs (a)(7)(iii) and (iv) of this section.
(vi) General effective date provision. This paragraph (a)(7) shall apply with respect to futures contracts and options entered into or acquired after October 21, 1988.
(8) Special rules for qualified funds—(i) Definition of qualified fund. The term “qualified fund” means any partnership if—
(A) At all times during the taxable year (and during each preceding taxable year to which an election under section 988(c)(1)(E)(iii)(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;
(B) The principa1 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;
(C) At least 90 percent of the gross income of the partnership for the taxable year (and each such preceding year) consists 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;
(D) 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
(E) An election under section 988 (c)(1)(E)(iii)(V) as provided in paragraph (a)(8)(iv) of this section applies to the taxable year.
(ii) Special rules relating to paragraph (a)(8)(i)(A) of this section—(A) Certain general partners. The interest of a general partner in the partnership shall not be treated as failing to meet the 20 percent ownership requirement of paragraph (a)(8)(i)(A) of this section for any taxable year of the partnership if, for the taxable year of the partner in which such partnership's taxable year ends, such partner (and each corporation filing a consolidated return with such partner) had no ordinary income or loss from a section 988 transaction (other than income from the partnership) which is exchange gain or loss (as the case may be).
(B) Treatment of incentive compensation. For purposes of paragraph (a)(8)(i)(A) of this section, any income allocable to a general partner as incentive compensation based on profits rather than capital shall not be taken into account in determining such partner's interest in the profits of the partnership.
(C) Treatment of tax exempt partners. The interest of a partner in the partnership shall not be treated as failing to meet the 20 percent ownership requirements of paragraph (a)(5)(8)(A) of this section if none of the income of such partner from such partnership is subject to tax under chapter 1 of subtitle A of the Internal Revenue Code (whether directly or through one or more pass-through entities).
(D) Look-through rule. In determining whether the 20 percent ownership requirement of paragraph (a)(8)(i)(A) of this section is met with respect to any partnership, any interest in such partnership held by another partnership shall be treated as held proportionately by the partners in such other partnership.
(iii) Other special rules—(A) Related persons. Interests in the partnership held by persons related to each other (within the meaning of section 267(b) or 707(b)) shall be treated as held by one person.
(B) Predecessors. Reference to any partnership shall include a reference to any predecessor thereof.
(C) Treatment of certain debt instruments. Solely for purposes of paragraph (a)(8)(i)(D) of this section, any debt instrument which is described in both paragraphs (a)(1)(ii) and (2)(i) of this section shall be treated as a commodity.
(iv) Procedure for making the election provided in section 988(c)(1)(E)(iii)(V). A partnership shall make the election provided in section 988(c)(1)(E)(iii)(V) by sending to the Internal Revenue Service Center, Examination Branch, Stop Number 92, Kansas City, MO 64999 a statement titled “QUALIFIED FUND ELECTION UNDER SECTION 988(c)(1)(E)(iii)(V)” that contains the following:
(A) The partnership's name, address, and taxpayer identification number;
(B) The name, address and taxpayer identification number of the general partner making the election on behalf of the partnership;
(C) The date the notice is mailed or otherwise delivered to the Internal Revenue Service Center;
(D) A brief description of the activity of the partnership;
(E) A statement that the partnership is making the election provided in section 988(c)(1)(E)(iii)(V);
(F) The date of the beginning of the taxable year for which the election is being made;
(G) If the election is filed after the first day of the taxable year, then a statement regarding whether the partnership previously held an instrument referred to in section 988(c)(1)(E)(i) during such taxable year and, if so, the first date during the taxable year on which such contract was held; and
(H) The signature of the general partner making the election.
The election shall be made by a general partner with management responsibility of the partnership's activities and a copy of such election shall be attached to the partnership's income tax return (Form 1065) for the first taxable year it is effective. It is not required to be attached to subsequent returns.
(v) Time for making the election. The election under section 988(c)(1)(E)(iii)(V) for any taxable year shall be made on or before the first day of the taxable year or, if later, on or before the first day during such year on which the partnership holds an instrument described in section 988(c)(1)(E)(i). The election under section 988(c)(1)(E)(iii)(V) shall apply to the taxable year for which made and all succeeding taxable years. Such election may only be revoked with the consent of the Commissioner. In determining whether to grant revocation of the election, recapture by the partners of the tax benefit derived from the election in previous taxable years will be considered.
(vi) Operative rules applicable to qualified funds—(A) In general. In the case of a qualified fund, any bank forward contract or any foreign currency futures contract traded on a foreign exchange which is not otherwise a section 1256 contract shall be treated as a section 1256 contract for purposes of section 1256.
(B) Gains and losses treated as short-term. In the case of any instrument treated as a section 1256 contract under paragraph (a)(8)(vi)(A) of this section, subparagraph (A) of section 1256(a)(3) shall be applied by substituting “100 percent” for “40 percent” (and subparagraph (B) of such section shall not apply).
(vii) Transition rule. An election made prior to September 21, 1989, which satisfied the requirements of Notice 88-124, 1988-51 I.R.B. 6, shall be deemed to satisfy the requirements of § 1.988-1(a)(8)(iv) and (v).
(viii) General effective date rules—(A) The requirements of subclause (IV) of section 988(c)(1)(E)(iii) shall not apply to contracts entered into or acquired on or before October 21, 1988.
(B) In the case of any partner in an existing partnership, the 20 percent ownership requirements of subclause (I) of section 988(c)(1)(E)(iii) shall be treated as met during any period during which such partner does not own a percentage interest in the capital or profits of such partnership greater than 33
1/3 percent (or, if lower, the lowest such percentage interest of such partner during any period after October 21, 1988, during which such partnership is in existence). For purposes of the preceding sentence, the term “existing partnership” means any partnership if—
(1) Such partnership was in existence on October 21, 1988, and principally engaged on such date in buying and selling options, futures, or forwards with respect to commodities; or
(2) A registration statement was filed with respect to such partnership with the Securities and Exchange Commission on or before such date and such registration statement indicated that the principal activity of such partnership will consist of buying and selling instruments referred to in paragraph (a)(8)(viii)(B)(1) of this section.
(9) Exception for certain transactions entered into by an individual—(i) In general. A transaction entered into by an individual which otherwise qualifies as a section 988 transaction shall be considered a section 988 transaction only to the extent expenses properly allocable to such transaction meet the requirements of section 162 or 212 (other than the part of section 212 dealing with expenses incurred in connection with taxes).
(ii) Examples. The following examples illustrate the application of paragraph (a)(9) of this section.
(10) Intra-taxpayer transactions—(i) In general. Except as provided in paragraph (a)(10)(ii) of this section, disregarded transactions between or among the taxpayer and/or qualified business units of that taxpayer (“intra-taxpayer transactions”) are not section 988 transactions. See section 987 and the regulations thereunder.
(ii) Certain intra-taxpayer transfers of section 988 transactions that result in the recognition of section 988 gain or loss—(A) In general. Exchange gain or loss with respect to nonfunctional currency or any item described in paragraph (a)(2) of this section entered into with another taxpayer shall be realized upon a transfer (as defined under § 1.987-2(c)) of such currency or item from an owner to a section 987 QBU or from a section 987 QBU to an owner if as a result of such transfer—
(1) The currency or item loses its character as nonfunctional currency or as an item described in paragraph (a)(2) of this section; or
(2) The source of the exchange gain or loss could be altered absent the application of paragraph (a)(10)(ii)(B) of this section.
(B) Computation of exchange gain or loss. Exchange gain or loss described in section (a)(10)(ii)(A) of this section shall be computed in accordance with § 1.988-2 (without regard to § 1.988-2(b)(8)) as if the nonfunctional currency or item described in paragraph (a)(2) of this section had been sold or otherwise transferred at fair market value between unrelated taxpayers. For purposes of the preceding sentence, a taxpayer must use a translation rate that is consistent with the translation conventions of the section 987 QBU to or from which, as the case may be, the item is being transferred. In the case of a gain or loss incurred in a transaction described in this paragraph (a)(10)(ii) that does not have a significant business purpose, the Commissioner may defer such gain or loss.
(iii) Example. The following example illustrates the provisions of this paragraph (a)(10).
(11) Authority to include or exclude transactions from section 988—(i) In general. The Commissioner may recharacterize a transaction (or series of transactions) in whole or in part as a section 988 transaction if the effect of such transaction (or series of transactions) is to avoid section 988. In addition, the Commissioner may exclude a transaction (or series of transactions) which in form is a section 988 transaction from the provisions of section 988 if the substance of the transaction (or series of transactions) indicates that it is not properly considered a section 988 transaction.
(ii) Example. The following example illustrates the provisions of this paragraph (a)(11).
(b) Spot contract. A spot contract is a contract to buy or sell nonfunctional currency on or before two business days following the date of the execution of the contract. See § 1.988-2 (d)(1)(ii) for operative rules regarding spot contracts.
(c) Nonfunctional currency. The term “nonfunctional currency” means with respect to a taxpayer or a qualified business unit (as defined in section 989 (a)) a currency (including the European Currency Unit) other than the taxpayer's or the qualified business unit's functional currency as defined in section 985 and the regulations thereunder. For rules relating to nonrecognition of exchange gain or loss with respect to certain dispositions of nonfunctional currency, see § 1.988-2 (a)(1)(iii).
(d) Spot rate—(1) In general. Except as otherwise provided in this paragraph, the term “spot rate” means a rate demonstrated to the satisfaction of the District Director or the Assistant Commissioner (International) to reflect a fair market rate of exchange available to the public for currency under a spot contract in a free market and involving representative amounts. In the absence of such a demonstration, the District Director or the Assistant Commissioner (International), in his or her sole discretion, shall determine the spot rate from a source of exchange rate information reflecting actual transactions conducted in a free market. For example, the taxpayer or the District Director or the Assistant Commissioner (International) may determine the spot rate by reference to exchange rates published in the pertinent monthly issue of “International Financial Statistics” or a successor publication of the International Monetary Fund; exchange rates published by the Board of Governors of the Federal Reserve System pursuant to 31 U.S.C. section 5151; exchange rates published in newspapers, financial journals or other daily financial news sources; or exchange rates quoted by electronic financial news services.
(2) Consistency required in valuing transactions subject to section 988. If the use of inconsistent sources of spot rate quotations results in the distortion of income, the District Director or the Assistant Commissioner (International) may determine the appropriate spot rate.
(3) Use of certain spot rate conventions for payables and receivables denominated in nonfunctional currency. If consistent with the taxpayer's financial accounting, a taxpayer may utilize a spot rate convention determined at intervals of one quarter year or less for purposes of computing exchange gain or loss with respect to payables and receivables denominated in a nonfunctional currency that are incurred in the ordinary course of business with respect to the acquisition or sale of goods or the obtaining or performance of services. For example, if consistent with the taxpayer's financial accounting, a taxpayer may accrue all payables and receivables incurred during the month of January at the spot rate on December 31 or January 31 (or at an average of any spot rates occurring between these two dates) and record the payment or receipt of amounts in satisfaction of such payables and receivables consistent with such convention. The use of a spot rate convention cannot be changed without the consent of the Commissioner.
(4) Currency where an official government established rate differs from a free market rate—(i) In general. If a currency has an official government established rate that differs from a free market rate, the spot rate shall be the rate which most clearly reflects the taxpayer's income. Generally, this shall be the free market rate.
(ii) Examples. The following examples illustrate the application of this paragraph (d)(4).
(e) Exchange gain or loss. The term “exchange gain or loss” means the amount of gain or loss realized as determined in § 1.988-2 with respect to a section 988 transaction. Except as otherwise provided in these regulations (e.g., § 1.98B-5), the amount of exchange gain or loss from a section 988 transaction shall be separately computed for each section 988 transaction, and such amount shall not be integrated with gain or loss recognized on another transaction (whether or not such transaction is economically related to the section 988 transaction). See § 1.988-2 (b)(8) for a special rule with respect to debt instruments.
(f) Hyperinflationary currency—(1) Definition—(i) General rule. For purposes of section 988, a hyperinflationary currency means a currency described in § 1.985-1(b)(2)(ii)(D). Unless otherwise provided, the currency in any example used in §§ 1.988-1 through 1.988-5 is not a hyperinflationary currency.
(ii) Special rules for determining base period. In determining whether a currency is hyperinflationary under § 1.985-1(b)(2)(ii)(D) for purposes of this paragraph (f), the following rules will apply:
(A) The base period means the thirty-six calendar month period ending on the last day of the taxpayer's (or qualified business unit's) current taxable year. Thus, for example, if for 1996, 1997, and 1998, a country's annual inflation rates are 6 percent, 11 percent, and 90 percent, respectively, the cumulative inflation rate for the three-year base period is 124% [((1.06 × 1.11 × 1.90) − 1.0 = 1.24) × 100 = 124%]. Accordingly, assuming the QBU has a calendar year as its taxable year, the currency of the country is hyperinflationary for the 1998 taxable year. This change in the § 1.985-1(b)(2)(ii)(D) base period shall not apply to any section 988 transaction of an entity described in section 851 (regulated investment company (RIC)) or section 856 (real estate investment trust (REIT)). The Service may, by notice, provide that the foregoing change in the § 1.985-1(b)(2)(ii)(D) base period does not apply to any section 988 transaction of an entity with distribution requirements similar to a RIC or REIT.
(B) The last sentence of § 1.985-1(b)(2)(ii)(D) shall not apply to alter the base period for purposes of this paragraph (f) in determining whether a currency is hyperinflationary for purposes of section 988. Accordingly, generally accepted accounting principles may not apply to alter the base period for purposes of this paragraph (f).
(2) Effective date. Paragraph (f)(1) of this section shall apply to transactions entered into after February 14, 2000.
(g) Fair market value. The fair market value of an item shall, where relevant, reflect an appropriate premium or discount for the time value of money (e.g., the fair market value of a forward contract to buy or sell nonfunctional currency shall reflect the present value of the difference between the units of nonfunctional currency times the market forward rate at the time of valuation and the units of nonfunctional currency times the forward rate set forth in the contract). However, if consistent with the taxpayer's method of financial accounting (and consistently applied from year to year), the preceding sentence shall not apply to a financial instrument that matures within one year from the date of issuance or acquisition. Unless otherwise provided, the fair market value given in any example used in §§ 1.988-1 through 1.988-5 is deemed to reflect appropriately the time value of money. If the use of inconsistent sources of forward or other market rate quotations results in the distortion of income, the District Director or the Assistant Commissioner (International) may determine the appropriate rate.
(h) Interaction with sections 1092 and 1256. Unless otherwise provided, it is assumed for purposes of §§ 1.988-1 through 1.988-5 that any contract used in any example is not a section 1256 contract and is not part of a straddle as defined in section 1092. No inference is intended regarding the application of section 1092 or 1256 unless expressly stated.
(i) Applicability date—(1) In general. Except as otherwise provided in this section, this section applies to taxable years beginning after December 31, 1986. Thus, except as otherwise provided in this section, any payments made or received with respect to a section 988 transaction in taxable years beginning after December 31, 1986, are subject to this section.
(2) Paragraph (a)(10)(ii). Generally, paragraph (a)(10)(ii) of this section applies to taxable years beginning after December 31, 2024. However, if pursuant to § 1.987-15(b), a taxpayer chooses to apply §§ 1.987-1 through 1.987-15 to a taxable year before the first taxable year described in § 1.987-15(a)(1), then paragraph (a)(10)(ii) of this section applies to that taxable year. See § 1.988-1(i), as contained in 26 CFR in part 1 in effect on April 1, 2024, for a prior applicability date for paragraph (a)(10)(ii) of this section.
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Treas. Reg. §1.988-1(a)Section 988 transaction—(1) In general.
Section 988 transaction—(1) In general. The term “section 988 transaction” means any of the following transactions—
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Treas. Reg. §1.988-1(b)Spot contract.
Spot contract. A spot contract is a contract to buy or sell nonfunctional currency on or before two business days following the date of the execution of the contract. See § 1.988-2 (d)(1)(ii) for operative rules regarding spot contracts.
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Treas. Reg. §1.988-1(c)Nonfunctional currency.
Nonfunctional currency. The term “nonfunctional currency” means with respect to a taxpayer or a qualified business unit (as defined in section 989 (a)) a currency (including the European Currency Unit) other than the taxpayer's or the qualified business unit's functional currency as defined in section 985 and the regulations thereunder. For rules relating to nonrecognition of exchange gain or loss with respect to certain dispositions of nonfunctional currency, see § 1.988-2 (a)(1)(iii).
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Treas. Reg. §1.988-1(d)Spot rate—(1) In general.
Spot rate—(1) In general. Except as otherwise provided in this paragraph, the term “spot rate” means a rate demonstrated to the satisfaction of the District Director or the Assistant Commissioner (International) to reflect a fair market rate of exchange available to the public for currency under a spot contract in a free market and involving representative amounts. In the absence of such a demonstration, the District Director or the Assistant Commissioner (International), in his or her sole discretion, shall determine the spot rate from a source of exchange rate information reflecting actual transactions conducted in a free market. For example, the taxpayer or the District Director or the Assistant Commissioner (International) may determine the spot rate by reference to exchange rates published in the pertinent monthly issue of “International Financial Statistics” or a successor publication of the International Monetary Fund; exchange rates published by the Board of Governors of the Federal Reserve System pursuant to 31 U.S.C. section 5151; exchange rates published in newspapers, financial journals or other daily financial news sources; or exchange rates quoted by electronic financial news services.
(2) Consistency required in valuing transactions subject to section 988. If the use of inconsistent sources of spot rate quotations results in the distortion of income, the District Director or the Assistant Commissioner (International) may determine the appropriate spot rate.
(3) Use of certain spot rate conventions for payables and receivables denominated in nonfunctional currency. If consistent with the taxpayer's financial accounting, a taxpayer may utilize a spot rate convention determined at intervals of one quarter year or less for purposes of computing exchange gain or loss with respect to payables and receivables denominated in a nonfunctional currency that are incurred in the ordinary course of business with respect to the acquisition or sale of goods or the obtaining or performance of services. For example, if consistent with the taxpayer's financial accounting, a taxpayer may accrue all payables and receivables incurred during the month of January at the spot rate on December 31 or January 31 (or at an average of any spot rates occurring between these two dates) and record the payment or receipt of amounts in satisfaction of such payables and receivables consistent with such convention. The use of a spot rate convention cannot be changed without the consent of the Commissioner.
(4) Currency where an official government established rate differs from a free market rate—(i) In general. If a currency has an official government established rate that differs from a free market rate, the spot rate shall be the rate which most clearly reflects the taxpayer's income. Generally, this shall be the free market rate.
(ii) Examples. The following examples illustrate the application of this paragraph (d)(4).
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Treas. Reg. §1.988-1(e)Exchange gain or loss.
Exchange gain or loss. The term “exchange gain or loss” means the amount of gain or loss realized as determined in § 1.988-2 with respect to a section 988 transaction. Except as otherwise provided in these regulations (e.g., § 1.98B-5), the amount of exchange gain or loss from a section 988 transaction shall be separately computed for each section 988 transaction, and such amount shall not be integrated with gain or loss recognized on another transaction (whether or not such transaction is economically related to the section 988 transaction). See § 1.988-2 (b)(8) for a special rule with respect to debt instruments.
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Treas. Reg. §1.988-1(f)Hyperinflationary currency—(1) Definition—(i) General rule.
Hyperinflationary currency—(1) Definition—(i) General rule. For purposes of section 988, a hyperinflationary currency means a currency described in § 1.985-1(b)(2)(ii)(D). Unless otherwise provided, the currency in any example used in §§ 1.988-1 through 1.988-5 is not a hyperinflationary currency.
(ii) Special rules for determining base period. In determining whether a currency is hyperinflationary under § 1.985-1(b)(2)(ii)(D) for purposes of this paragraph (f), the following rules will apply:
(A) The base period means the thirty-six calendar month period ending on the last day of the taxpayer's (or qualified business unit's) current taxable year. Thus, for example, if for 1996, 1997, and 1998, a country's annual inflation rates are 6 percent, 11 percent, and 90 percent, respectively, the cumulative inflation rate for the three-year base period is 124% [((1.06 × 1.11 × 1.90) − 1.0 = 1.24) × 100 = 124%]. Accordingly, assuming the QBU has a calendar year as its taxable year, the currency of the country is hyperinflationary for the 1998 taxable year. This change in the § 1.985-1(b)(2)(ii)(D) base period shall not apply to any section 988 transaction of an entity described in section 851 (regulated investment company (RIC)) or section 856 (real estate investment trust (REIT)). The Service may, by notice, provide that the foregoing change in the § 1.985-1(b)(2)(ii)(D) base period does not apply to any section 988 transaction of an entity with distribution requirements similar to a RIC or REIT.
(B) The last sentence of § 1.985-1(b)(2)(ii)(D) shall not apply to alter the base period for purposes of this paragraph (f) in determining whether a currency is hyperinflationary for purposes of section 988. Accordingly, generally accepted accounting principles may not apply to alter the base period for purposes of this paragraph (f).
(2) Effective date. Paragraph (f)(1) of this section shall apply to transactions entered into after February 14, 2000.
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Treas. Reg. §1.988-1(g)Fair market value.
Fair market value. The fair market value of an item shall, where relevant, reflect an appropriate premium or discount for the time value of money (e.g., the fair market value of a forward contract to buy or sell nonfunctional currency shall reflect the present value of the difference between the units of nonfunctional currency times the market forward rate at the time of valuation and the units of nonfunctional currency times the forward rate set forth in the contract). However, if consistent with the taxpayer's method of financial accounting (and consistently applied from year to year), the preceding sentence shall not apply to a financial instrument that matures within one year from the date of issuance or acquisition. Unless otherwise provided, the fair market value given in any example used in §§ 1.988-1 through 1.988-5 is deemed to reflect appropriately the time value of money. If the use of inconsistent sources of forward or other market rate quotations results in the distortion of income, the District Director or the Assistant Commissioner (International) may determine the appropriate rate.
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Treas. Reg. §1.988-1(h)Interaction with sections 1092 and 1256.
Interaction with sections 1092 and 1256. Unless otherwise provided, it is assumed for purposes of §§ 1.988-1 through 1.988-5 that any contract used in any example is not a section 1256 contract and is not part of a straddle as defined in section 1092. No inference is intended regarding the application of section 1092 or 1256 unless expressly stated.
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Treas. Reg. §1.988-1(i)Applicability date—(1) In general.
Applicability date—(1) In general. Except as otherwise provided in this section, this section applies to taxable years beginning after December 31, 1986. Thus, except as otherwise provided in this section, any payments made or received with respect to a section 988 transaction in taxable years beginning after December 31, 1986, are subject to this section.
(2) Paragraph (a)(10)(ii). Generally, paragraph (a)(10)(ii) of this section applies to taxable years beginning after December 31, 2024. However, if pursuant to § 1.987-15(b), a taxpayer chooses to apply §§ 1.987-1 through 1.987-15 to a taxable year before the first taxable year described in § 1.987-15(a)(1), then paragraph (a)(10)(ii) of this section applies to that taxable year. See § 1.988-1(i), as contained in 26 CFR in part 1 in effect on April 1, 2024, for a prior applicability date for paragraph (a)(10)(ii) of this section.
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Treas. Reg. §1.988-1(v)Time for making the election.
Time for making the election. The election under section 988(c)(1)(E)(iii)(V) for any taxable year shall be made on or before the first day of the taxable year or, if later, on or before the first day during such year on which the partnership holds an instrument described in section 988(c)(1)(E)(i). The election under section 988(c)(1)(E)(iii)(V) shall apply to the taxable year for which made and all succeeding taxable years. Such election may only be revoked with the consent of the Commissioner. In determining whether to grant revocation of the election, recapture by the partners of the tax benefit derived from the election in previous taxable years will be considered.
(vi) Operative rules applicable to qualified funds—(A) In general. In the case of a qualified fund, any bank forward contract or any foreign currency futures contract traded on a foreign exchange which is not otherwise a section 1256 contract shall be treated as a section 1256 contract for purposes of section 1256.
(B) Gains and losses treated as short-term. In the case of any instrument treated as a section 1256 contract under paragraph (a)(8)(vi)(A) of this section, subparagraph (A) of section 1256(a)(3) shall be applied by substituting “100 percent” for “40 percent” (and subparagraph (B) of such section shall not apply).
(vii) Transition rule. An election made prior to September 21, 1989, which satisfied the requirements of Notice 88-124, 1988-51 I.R.B. 6, shall be deemed to satisfy the requirements of § 1.988-1(a)(8)(iv) and (v).
(viii) General effective date rules—(A) The requirements of subclause (IV) of section 988(c)(1)(E)(iii) shall not apply to contracts entered into or acquired on or before October 21, 1988.
(B) In the case of any partner in an existing partnership, the 20 percent ownership requirements of subclause (I) of section 988(c)(1)(E)(iii) shall be treated as met during any period during which such partner does not own a percentage interest in the capital or profits of such partnership greater than 33
1/3 percent (or, if lower, the lowest such percentage interest of such partner during any period after October 21, 1988, during which such partnership is in existence). For purposes of the preceding sentence, the term “existing partnership” means any partnership if—
(1) Such partnership was in existence on October 21, 1988, and principally engaged on such date in buying and selling options, futures, or forwards with respect to commodities; or
(2) A registration statement was filed with respect to such partnership with the Securities and Exchange Commission on or before such date and such registration statement indicated that the principal activity of such partnership will consist of buying and selling instruments referred to in paragraph (a)(8)(viii)(B)(1) of this section.
(9) Exception for certain transactions entered into by an individual—(i) In general. A transaction entered into by an individual which otherwise qualifies as a section 988 transaction shall be considered a section 988 transaction only to the extent expenses properly allocable to such transaction meet the requirements of section 162 or 212 (other than the part of section 212 dealing with expenses incurred in connection with taxes).
(ii) Examples. The following examples illustrate the application of paragraph (a)(9) of this section.
(10) Intra-taxpayer transactions—(i) In general. Except as provided in paragraph (a)(10)(ii) of this section, disregarded transactions between or among the taxpayer and/or qualified business units of that taxpayer (“intra-taxpayer transactions”) are not section 988 transactions. See section 987 and the regulations thereunder.
(ii) Certain intra-taxpayer transfers of section 988 transactions that result in the recognition of section 988 gain or loss—(A) In general. Exchange gain or loss with respect to nonfunctional currency or any item described in paragraph (a)(2) of this section entered into with another taxpayer shall be realized upon a transfer (as defined under § 1.987-2(c)) of such currency or item from an owner to a section 987 QBU or from a section 987 QBU to an owner if as a result of such transfer—
(1) The currency or item loses its character as nonfunctional currency or as an item described in paragraph (a)(2) of this section; or
(2) The source of the exchange gain or loss could be altered absent the application of paragraph (a)(10)(ii)(B) of this section.
(B) Computation of exchange gain or loss. Exchange gain or loss described in section (a)(10)(ii)(A) of this section shall be computed in accordance with § 1.988-2 (without regard to § 1.988-2(b)(8)) as if the nonfunctional currency or item described in paragraph (a)(2) of this section had been sold or otherwise transferred at fair market value between unrelated taxpayers. For purposes of the preceding sentence, a taxpayer must use a translation rate that is consistent with the translation conventions of the section 987 QBU to or from which, as the case may be, the item is being transferred. In the case of a gain or loss incurred in a transaction described in this paragraph (a)(10)(ii) that does not have a significant business purpose, the Commissioner may defer such gain or loss.
(iii) Example. The following example illustrates the provisions of this paragraph (a)(10).
(11) Authority to include or exclude transactions from section 988—(i) In general. The Commissioner may recharacterize a transaction (or series of transactions) in whole or in part as a section 988 transaction if the effect of such transaction (or series of transactions) is to avoid section 988. In addition, the Commissioner may exclude a transaction (or series of transactions) which in form is a section 988 transaction from the provisions of section 988 if the substance of the transaction (or series of transactions) indicates that it is not properly considered a section 988 transaction.
(ii) Example. The following example illustrates the provisions of this paragraph (a)(11).
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Treas. Reg. §1.988-1TCertain definitions and special rules
(a)(1) through (a)(2) [Reserved] For further guidance, see § 1.988-1(a)(1) through (2).
(3) Specified owner functional currency transactions of a section 987 QBU not treated as section 988 transactions. Specified owner functional currency transactions, as defined in § 1.987-3T(b)(4)(ii), held by a section 987 QBU are not treated as section 988 transactions. Thus, no currency gain or loss shall be recognized by a section 987 QBU under section 988 with respect to such transactions.
(4) through (i) [Reserved] For further guidance, see § 1.988-1(a)(4) through (i).
(j) Effective/applicability date. This section applies to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016. Notwithstanding the preceding sentence, if a taxpayer makes an election under § 1.987-11(b), then this section applies to taxable years to which §§ 1.987-1 through 1.987-10 apply as a result of such election.
(k) Expiration date. The applicability of this section expires on December 6, 2019.
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Treas. Reg. §1.988-1T(a)§1.988-1T(a)
(1) through (a)(2) [Reserved] For further guidance, see § 1.988-1(a)(1) through (2).
(3) Specified owner functional currency transactions of a section 987 QBU not treated as section 988 transactions. Specified owner functional currency transactions, as defined in § 1.987-3T(b)(4)(ii), held by a section 987 QBU are not treated as section 988 transactions. Thus, no currency gain or loss shall be recognized by a section 987 QBU under section 988 with respect to such transactions.
(4) through (i) [Reserved] For further guidance, see § 1.988-1(a)(4) through (i).
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Treas. Reg. §1.988-1T(j)Effective/applicability date.
Effective/applicability date. This section applies to taxable years beginning on or after one year after the first day of the first taxable year following December 7, 2016. Notwithstanding the preceding sentence, if a taxpayer makes an election under § 1.987-11(b), then this section applies to taxable years to which §§ 1.987-1 through 1.987-10 apply as a result of such election.
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Treas. Reg. §1.988-1T(k)Expiration date.
Expiration date. The applicability of this section expires on December 6, 2019.
56 Citing Cases
We hold that they do.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
nterest in the lower tier partnership. The lower tier partnership entered into offsetting option contracts with Deutsche Bank. Each option contract purported to be a foreign 4Mr. Beer testified that POPS was designed to exploit the straddle rules in section 988. He believed that these rules were designed to prevent a taxpayer from closing the loss leg ofa straddle and deferring the gain leg to a subsequent tax period. POPS accordingly switched the order ofthese events: investors closed the gain
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
nd Notice ofDeficiency Chenery timely filed Form 1120S for its tax year 2000. Petitioners attached to that return Form 4797, in which Chenery claimed a net loss of$4,334,456 from the "Sale ofEUR Deposit".2° Chenery treated the loss as ordinary under section 988. The ordinary loss substantially offset Chenery's income for 2000, reducing it from $4,346,254 to $11,798. Ms. Montgomery prepared Chenery's Form 1120S for its tax year 2000. Mr. Hahn signed that return. Petitioners filed Form 1040, U.S.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
nterest in the lower tier partnership. The lower tier partnership entered into offsetting option contracts with Deutsche Bank. Each option contract purported to be a foreign 4Mr. Beer testified that POPS was designed to exploit the straddle rules in section 988. He believed that these rules were designed to prevent a taxpayer from closing the loss leg ofa straddle and deferring the gain leg to a subsequent tax period. POPS accordingly switched the order ofthese events: investors closed the gain
nterest in the lower tier partnership. The lower tier partnership entered into offsetting option contracts with Deutsche Bank. Each option contract purported to be a foreign 4Mr. Beer testified that POPS was designed to exploit the straddle rules in section 988. He believed that these rules were designed to prevent a taxpayer from closing the loss leg ofa straddle and deferring the gain leg to a subsequent tax period. POPS accordingly switched the order ofthese events: investors closed the gain
nterest in the lower tier partnership. The lower tier partnership entered into offsetting option contracts with Deutsche Bank. Each option contract purported to be a foreign 4Mr. Beer testified that POPS was designed to exploit the straddle rules in section 988. He believed that these rules were designed to prevent a taxpayer from closing the loss leg ofa straddle and deferring the gain leg to a subsequent tax period. POPS accordingly switched the order ofthese events: investors closed the gain
nterest in the lower tier partnership. The lower tier partnership entered into offsetting option contracts with Deutsche Bank. Each option contract purported to be a foreign 4Mr. Beer testified that POPS was designed to exploit the straddle rules in section 988. He believed that these rules were designed to prevent a taxpayer from closing the loss leg ofa straddle and deferring the gain leg to a subsequent tax period. POPS accordingly switched the order ofthese events: investors closed the gain
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
nterest in the lower tier partnership. The lower tier partnership entered into offsetting option contracts with Deutsche Bank. Each option contract purported to be a foreign 4Mr. Beer testified that POPS was designed to exploit the straddle rules in section 988. He believed that these rules were designed to prevent a taxpayer from closing the loss leg ofa straddle and deferring the gain leg to a subsequent tax period. POPS accordingly switched the order ofthese events: investors closed the gain
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
nterest in the lower tier partnership. The lower tier partnership entered into offsetting option contracts with Deutsche Bank. Each option contract purported to be a foreign 4Mr. Beer testified that POPS was designed to exploit the straddle rules in section 988. He believed that these rules were designed to prevent a taxpayer from closing the loss leg ofa straddle and deferring the gain leg to a subsequent tax period. POPS accordingly switched the order ofthese events: investors closed the gain
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
They say this generated a portion ofthe section 988 loss GG Capital claimed in 2000.
988 provides that foreign currency gain or loss shall be computed separately and treated as ordinary income or loss.
The problem for Putanec is that section 988 doesn't apply to "personal transaction[s]." See sec.
The problem for Putanec is that section 988 doesn't apply to "personal transaction[s]." See sec.
Riverboat Services claimed a "section 988 Currency Loss" ofnearly $4 million.
Lawrence On its Form 4797, 466 reported a $14,300 ordinary gain from a "yen currency option (section 988)." The acquisition date ofthe foreign-currency- option was reported as November 1, 2001, and the disposition date was reported as December 10, 2001.
-20- [*20] On the 2003 Form 1065, Buyuk also claimed an ordinary loss deduction, identified as "Sale ofDebt Instruments - Section 988", of$4,458,816 on the purported sale ofthe Buyuk receivables computed as follows: Basis Proceeds Gain (Loss) $4,528,0471 $69,231 ($4,458,816) iThe Buyuk receivables took a basis in the amount ofthe receivables' face value using the RUB/USD exchange rate applicable on the alleged dates of origination.
-20- [*20] On the 2003 Form 1065, Buyuk also claimed an ordinary loss deduction, identified as "Sale ofDebt Instruments - Section 988", of$4,458,816 on the purported sale ofthe Buyuk receivables computed as follows: Basis Proceeds Gain (Loss) $4,528,0471 $69,231 ($4,458,816) iThe Buyuk receivables took a basis in the amount ofthe receivables' face value using the RUB/USD exchange rate applicable on the alleged dates of origination.
Lawrence On its Form 4797, 466 reported a $14,300 ordinary gain from a "yen currency option (section 988)." The acquisition date ofthe foreign-currency- option was reported as November 1, 2001, and the disposition date was reported as December 10, 2001.
Lawrence On its Form 4797, 466 reported a $14,300 ordinary gain from a "yen currency option (section 988)." The acquisition date ofthe foreign-currency- option was reported as November 1, 2001, and the disposition date was reported as December 10, 2001.
egulations were proposedto be effective for debt instruments issued on or after 60 days after publication offinal regulations. The 1994 proposed regulations would not apply to debt instruments that had a dual currency feature and would be subject to sec. 988. Final regulations were issued on June 14, 1996, T.D. 8674, 1996-2 C.B. 84, relating to certain contingent payment debt obligations. Those regulations applied to debt instruments issued on or after August 13, 1996. Those regulations did not
988 and preexisting law, s_ee_Nat'l- Standard Co. v. Commissioner, 80 T.C. 551, 558 (1983), aff'd, 749 F.2d 369 (6th Cir. 1984), foreign currency is generally considered property other than money for Federal income tax purposes. -30- received the paired foreign currency options as contributions and assignments from the option partners (the Lo
The disclosure statement further revealed that M&S realized an ordinary loss of$3,866,242 under the provisions ofsection 988 and that petitioners incurred business expenses of$500,000 paid to Chenery that were to be applied against anticipatedtransaction costs.
. -13- December 28, 2001 for a cost basis of$9,480,7131° and sold on the same day for $1,839,007. The loss purportedly resulted from Murus exchanging the CHF 3,105,267 for $1,839,007 in the swap transaction. Murus treated the loss as ordinary under section 988. The ordinary loss substantially offset Murus' shared fees income for 2001. Edwin Nakumura, CPA, prepared Murus' tax returns for 2001. Petitioner filed Form 1040, U.S. Individual Income Tax Return, for 2001 reporting $3,244 offlowthrough i
egulations were proposedto be effective for debt instruments issued on or after 60 days after publication offinal regulations. The 1994 proposed regulations would not apply to debt instruments that had a dual currency feature and would be subject to sec. 988. Final regulations were issued on June 14, 1996, T.D. 8674, 1996-2 C.B. 84, relating to certain contingent payment debt obligations. Those regulations applied to debt instruments issued on or after August 13, 1996. Those regulations did not
Credits, Deductions, etc., page 3, of the partnership return). These line items were described in greater detail in Statements 1 and 2 of the return, reproduced below. Statement 1, which attributes the negative figure -257,857 to “ordinary loss from sec. 988 transactions”, thereby indicates that this negative figure included the net loss claimed by Tigers Eye on the termination or unwinding of the contributed paired options, as well as the results of other foreign currency transactions. The part
The taxpayer may argue that a loss is characterized as ordinary if the transaction also qualifies as a section 988 transaction." Section 1256(b) defines a "section 1256 contract" to include: (1) Any regulated futares contract; (2) any foreign currency contract; (3) any noneguity option; (4) any dealer equity option; and (5) any dealer securities futures contract.
1. 988-3 (a) , Income Tax Regs . (Unless we say otherwise, all section refe ences are to the Internal Revenue Code ià effect for the year 'lat issue.) ' ' -7- right--was not entirely comprehensible. But Garza's tutorials never really got Palmlund interested in the theory of how to make foreign-currency options trading profitable
Form 4797, Sales of Business Property, attached to the Form 1040, reported the CARDS transaction generally in the following terms: On December 5, 2000, petitioners acquired property in a foreign currency transaction pursuant to section 988 at a cost or other basis of - 17 - $11,739,258,8 and they sold it, on December·21, 2000, for $1, 800 , 934 , ' generating an ordinary loss of $9, 938 , 324 .
The los-s from the exchange and sale of the loan assets was a foreign currency loss under section 988 because it was an acquisition of a "nonfunctional" currency.
6226(a).1 Respondent's principal adjustment was to disallow Rovakat's claim to section 988 ordinary losses of $130,766 for 2002, $890,485 for 2003, and $2,479,991 for 2004.
) - 16 - characterized as ordinary if the transaction also qualifies as a section 988 transaction.
The taxpayer may argue that the loss is characterized as ordinary if the transaction also qualifies as a section 988 transaction.
; (4) alternatively, whether the MLD contracts should be treated as a single integrated transaction with a net tax .basis of $55,00.0 under the substance over form doctrine and section 988 ; and (5) whether any underpayment of tax attributable to the adjustments to partnership items is subject to the section 6662 accuracy-related penalty, as determined at the partnership level .
Section 1 .988- 1(a)(1), Income Tax Regs ., provides that disposition of a nonfunctional currency is a section 988 transaction .
Exchange gain or loss with respect to a contract described in § 1 .988-2(d)(1) [i .e ., foreign currency forward contracts, futures contracts, and options] shall be determined by subtracting the amount paid (or deemed paid), if any, for or with respect to the contract (including any amount paid upon termination of the contract) from the amount received (or deemed received), if any, for or with respect to the contract (including any amount received upon termination of the contract) . Any .gain or
ss equal to the long option premiums of $8,400,000 and treated the expiration of the short options as causing the realization of a gain equal to the premiums of $8,316,000. Highwood attached a statement to its return describing the $84,000 loss as a section 988 loss. However, Highwood did not disclose that the net loss resulted from the expiration of the long and short options and did not separately report the $8,400,000 loss from the long options and the $8,316,000 gain from the short options.
ated Federal income tax return, however, petitioner treated the overdraft amount as a loan by Citibank Tokyo to Intergraph, not as a loan to Nihon Intergraph, and petitioner treated Intergraph's transfer of the ¥823,943,385 - 11 - into Nihon Intergraph's checking account at Citibank Tokyo as giving rise to a $1,923,103 foreign currency loss under section 988 and to a $520,432 interest deduction under section 163(a).
consolidated Federal income tax return, however, petitioner treated the overdraft amount as a loan by Citibank Tokyo to Intergraph, not as a loan to Nihon Intergraph, and petitioner treated Intergraph’s transfer of the ¥823,943,385 into Nihon Intergraph’s checking account at Citibank Tokyo as giving rise to a $1,923,103 foreign currency loss under section 988 and to a $520,432 interest deduction under section 163(a).