Section 988

What Is Section 988?

IRC Section 988 is a tax regulation overseeing capital losses or gains on investments held in a foreign (nonfunctional) currency. A Section 988 transaction connects with Section 988(c)(1) of the Internal Revenue Code, which came full circle after Dec. 31, 1986.

How Section 988 Works

Per rules of the Internal Revenue Code (IRC), gains or losses must be recognized at the hour of sale or disposition of a foreign currency-named capital asset. Likewise, most gains from foreign currency transactions are to be treated as ordinary income, whether earned by an individual or a corporation. Gains and losses not really connected with foreign exchange vacillation from these transactions are regularly seen outside of any gain or loss due to exchange rate changes between the U.S. dollar and the foreign currency.

Section 988 transactions are nonfunctional currency transactions that generally bring about functional currency gain or loss. (Note that a taxpayer's functional currency is the US Dollar, with the exception of stated in any case in the code and regulations). Section 988 regulation gives that the foreign currency element of a transaction must be registered and considered separately from the gain or loss on the underlying transaction. The gain or loss credited to the foreign currency is treated as ordinary income. For example, a debt holder can have a gain or loss on their underlying position in the event that interest rates or the credit rating of the issuer of the debt instrument changes. Section 988 transactions incorporate the acquisition of foreign bonds (which have their interest and principal in a locally "nonfunctional" currency), accrued expenses or receipts in a foreign currency, options, forward contracts, futures contracts, or comparable instruments named in any nonfunctional currency. On the off chance that there is gain or loss on the underlying transaction, as well as offsetting foreign currency loss or gain, the two ought to be gotten; just the excess foreign currency loss or gain, if any, ought to be reported separately under Section 988(a)(1)(A).

Model

For example, if a U.S. bank issues a bond that is designated in the euro, it is viewed as a 988 transaction. Foreign currency gain or loss on a 988 transaction is treated as ordinary income or loss except if an election is made to regard it as a capital gain or loss. For example, in the event that an investor makes an election before the transaction is placed into, they might have the option to group the gain or loss on a specific investment as a capital gain as opposed to ordinary income. This most frequently applies to forward contract transactions, options, and futures.

Features

• This section manages capital gains or losses incurred by holding foreign currency as well as through the translation of foreign transactions for the end goal of accounting.
• A section 988 transaction includes a currency other than the functional currency of the taxpayer not entirely set in stone in reference to the value of at least one nonfunctional currencies.
• Section 988 of the Internal Revenue Code portrays treatment of certain foreign currency transactions/