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

Search 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).