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Section 988

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A section 988 refers to a tax rule governing capital gains or losses on investments held in a foreign currency. The section 988 rule went into effect on January 1, 1987. Transactions covered by section 988 include those associated with the interest and principle received on foreign bonds, foreign currency futures, and expenses or receipts accrued in a foreign currency. Euro-denominated bonds issued by a U.S. bank are also considered a section 988 transaction. Foreign exchange positions, futures, and international bonds are the instruments most commonly affected by section 988 rules. Whether earned by individuals or corporations, federal tax authorities treat most capital gains under section 988 as ordinary income. However, in some cases involving forward contracts, futures, and options wherein an investor makes an election before entering into the transaction, a section 988 transaction may be taxed as a capital gain. Section 988 gains and losses are treated separately from gains and losses arising from changes in currency valuations.

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