26 U.S.C. § 988 : US Code - Section 988: Treatment of certain foreign currency transactions

    (a) General rule
      Notwithstanding any other provision of this chapter - 
      (1) Treatment as ordinary income or loss
        (A) In general
          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).
        (B) Special rule for forward contracts, etc.
          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).
      (2) Gain or loss treated as interest for certain purposes
        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).
      (3) Source
        (A) In general
          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.
        (B) Residence
          For purposes of this subpart - 
          (i) In general
            The 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
            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.
          (iii) Special rule for partnerships
            To the extent provided in regulations, in the case of a
          partnership, the determination of residence shall be made at
          the partner level.
        (C) Special rule for certain related party loans
          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:
            (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
          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.
    (b) Foreign currency gain or loss
      For purposes of this section - 
      (1) Foreign currency gain
        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.
      (2) Foreign currency loss
        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.
      (3) Special rule for certain contracts, etc.
        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).
    (c) Other definitions
      For purposes of this section - 
      (1) Section 988 transaction
        (A) In general
          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 - 
            (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 transactions
          For 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.
        (C) Special rules for disposition of nonfunctional currency
          (i) In general
            In 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
            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.
        (D) Exception for certain instruments marked to market
          (i) In general
            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.
          (ii) Election out
            (I) In general
              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.
            (II) Time for making election
              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)).
            (III) Special rule for partnerships, etc.
              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.
          (iii) Treatment of certain partnerships
            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.
        (E) Special rules for certain funds
          (i) In general
            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)).
          (ii) Special rule where electing partnership does not qualify
            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.
          (iii) Qualified fund defined
            For 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
              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.
            (II) Gains and losses treated as short-term
              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).
          (v) Special rules for clause (iii)(I)
            (I) Certain general partners
              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).
            (II) Treatment of incentive compensation
              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.
            (III) Treatment of tax-exempt partners
              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).
            (IV) Look-thru rule
              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.
          (vi) Other special rules
            For purposes of this subparagraph - 
            (I) Related persons
              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.
            (II) Predecessors
              References to any partnership shall include a reference
            to any predecessor thereof.
            (III) Inadvertent terminations
              Rules similar to the rules of section 7704(e) shall
            apply.
            (IV) Treatment of certain debt instruments
              For purposes of clause (iii)(IV), any debt instrument
            which is a section 988 transaction shall be treated as a
            commodity.
      (2) Booking date
        The 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
        The term "payment date" means the date on which the payment is
      made or received.
      (4) Debt instrument
        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.
      (5) Special rules where taxpayer takes or makes delivery
        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.
    (d) Treatment of 988 hedging transactions
      (1) In general
        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.
      (2) 988 hedging transaction
        For 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
        The preceding provisions of this section shall not apply to any
      section 988 transaction entered into by an individual which is a
      personal transaction.
      (2) Exclusion for certain personal transactions
        If - 
          (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 transactions
        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 - 
          (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).