International Tax

Tax Aspects of Foreign Currency (Portfolio 6660)

  • This Portfolio examines U.S. taxation of transactions translating foreign currency into U.S. dollars.


Bloomberg Tax Portfolio No. 6660, Tax Aspects of Foreign Currency, examines U.S. income taxation of transactions involving a functional foreign currency or a nonfunctional currency.

The Tax Reform Act of 1986 added to the Internal Revenue Code a comprehensive set of rules governing the U.S. tax treatment of gain or loss arising from fluctuations in the value of foreign currency and the conversion of foreign currency into U.S. dollars. Entering a then-uncodified area, the 1986 Act rules were intended to settle conflicting and confused decisional and administrative law. Subpart J (§985–§989) and its accompanying regulations provide a set of comprehensive and cohesive rules which govern the taxation of foreign currency gain or loss and certain transactions in which foreign currency plays a part. To do so, it works with three key concepts: (1) functional currency; (2) transactions in foreign currency; and (3) foreign currency translation.

The rules of subpart J control the timing, amount, character, and source of exchange gain or loss in relation to “section 988 transactions” (certain transactions in relation to which the amount the taxpayer is entitled to receive, or is required to pay, is determined in terms of, or by reference to, the value of a “nonfunctional currency”).

Most of the law to date is reflected in the statutory rules of subpart J of the Code and its enabling regulations. Although together they provide notable guidance, the law in the area is in a state of ongoing development. Little decisional law exists in relation to subpart J and there are few post-1986 administrative rulings or other pronouncements. Although final regulations were released in 2016, the uncertainty that plagues this area of tax law was not completely dealt with as the IRS has indicated that the final regulations are potentially subject to substantial modification. At the same time, transactions involving U.S. persons and foreign currency are increasing in number and sophistication. Thus, this subject is one in which detailed knowledge and skill, brought to bear both in the planning and compliance stages of tax practice, can provide affected taxpayers with useful benefits.

This Portfolio may be cited as Prillaman, 6660 T.M., Tax Aspects of Foreign Currency.

G. Prillaman, Jr.
G. Prillaman, Jr.
Partner (retired)
Deloitte Tax LLP
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