Foreign Currency Gain or Loss (Section 988)

Foreign currency gain or loss attributable to a “section 988 transaction” generally must be computed separately for each transaction and treated as ordinary income or expense, as the case may be.

However, a taxpayer may elect to treat the foreign currency gain or loss attributable to certain forward contracts, futures contracts, or options as capital gain or loss. 

A Section 988 transaction is...

1. the acquisition of a debt instrument or becoming the obligor under a debt instrument,
2. the accruing (or otherwise taking into account) of an item of expense or gross income or receipts which is to be paid or received after the accrual date, or
3. the entering into or acquiring of a forward contract, futures contract, option, or similar financial instrument.

This is the case if the amount the taxpayer is entitled to receive or is required to pay by reason of such transaction is either:

1. denominated in terms of a nonfunctional currency; or
2. determined by reference to the value of one or more nonfunctional currencies. 

The source of foreign currency gains and losses is determined by reference to the residence of the taxpayer or qualified business unit (QBU) on whose books the relevant asset, liability, or item of income or expense is properly reflected. A special source rule applies for certain related party loans. 

Two or more separate transactions may be integrated into a single “Section 988 hedging transaction” which is taxed in accordance with its economic substance.

The Code Sec. 988 rules do not apply to a personal transaction (i.e., any transaction entered into by an individual, unless the expenses properly allocable to it qualify as deductible business or investment expenses), unless the gain that would otherwise be recognized exceeds $200. An individual recognizes no gain from the fluctuations in exchange rates upon the disposition of foreign currency in a personal transaction. 

For more information about foreign currency gains or losses with respect to Sec. 988, go with a CPA firm that goes above and beyond, contact PIASCIK to set up a consultation. We’ll meet with you to show you all the benefits of being a PIASCIK client. (U.S.) (866) 501-4013, (International U.S.) +1 (804) 527-1815, (E-mail) info@piascik.com.