[Title 26 CFR 1.988]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.988 - 0 Taxation of gain or loss from a section 988 transaction; Table of Contents.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE102002-04-012002-04-01false0 Taxation of gain or loss from a section 988 transaction; Table of Contents.1.988Sec. 1.988INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.988-0  Taxation of gain or loss from a section 988 transaction; Table of Contents.

    This section lists captioned paragraphs contained in Secs. 1.988-1 
through 1.988-5.

          Sec. 1.988-1  Certain definitions and special rules.

    (a) Section 988 transaction.
    (1) In general.
    (2) Description of transactions.
    (3)-(5) [Reserved]
    (6) Examples.
    (7) Special rules for regulated futures contracts and non-equity 
options.
    (8) Special rules for qualified funds.
    (9) Exception for certain transactions entered into by an 
individual.
    (10) Intra-taxpayer transactions.
    (11) Authority of Commissioner to include or exclude transactions 
from section 988.
    (b) Spot contract.
    (c) Nonfunctional currency.
    (d) Spot rate.
    (1) In general.
    (2) Consistency required in valuing transactions subject to section 
988.
    (3) Use of certain spot rate conventions for payables and 
receivables denominated in nonfunctional currency.
    (4) Currency where an official government established rate differs 
from a free market rate.
    (e) Exchange gain or loss.
    (f) Hyperinflationary currency.
    (g) Fair market value.
    (h) Interaction with sections 1092 and 1256 in examples.
    (i) Effective date.

   Sec. 1.988-2  Recognition and computation of exchange gain or loss.

    (a) Disposition of nonfunctional currency.
    (1) Recognition of exchange gain or loss.
    (2) Computation of exchange gain or loss.
    (b) Translation of interest income or expense and determination of 
exchange gain or loss with respect to debt instruments.
    (1) Translation of interest income received with respect to a 
nonfunctional currency demand account.
    (2) Translation of nonfunctional currency interest income or expense 
received or paid with respect to a debt instrument described in 
Sec. 1.988-1(a)(1)(ii) and (2)(i).
    (3) Exchange gain or loss recognized by the holder with respect to 
accrued interest income.
    (4) Exchange gain or loss recognized by the obligor with respect to 
accrued interest expense.
    (5) Exchange gain or loss recognized by the holder of a debt 
instrument with respect to principal.
    (6) Exchange gain or loss recognized by the obligor of a debt 
instrument with respect to principal.
    (7) Payment ordering rules.
    (8) Limitation of exchange gain or loss on payment or disposition of 
a debt instrument.
    (9) Examples.
    (10) Treatment of bond premium.
    (11) Market discount.
    (12) Tax exempt bonds.
    (13) Nonfunctional currency debt exchanged for stock of obligor.
    (14) [Reserved]
    (15) Debt instruments and deposits denominated in hyperinflationary 
currencies.
    (16) Coordination with section 267 regarding debt instruments.
    (17) Coordination with installment method under section 453.
    (c) Item of expense or gross income or receipts which is to be paid 
or received after the date accrued.
    (1) In general.
    (2) Determination of exchange gain or loss with respect to an item 
of gross income or receipts.
    (3) Determination of exchange gain or loss with respect to an item 
of expense.
    (4) Examples.
    (d) Exchange gain or loss with respect to forward contracts, futures 
contracts and option contracts.

[[Page 572]]

    (1) Scope.
    (2) Realization of exchange gain or loss.
    (3) Recognition of exchange gain or loss.
    (4) Determination of exchange gain or loss.
    (5) Hyperinflationary contracts.
    (e) Currency swaps and notional principal contracts.
    (1) Notional principal contract denominated in a single 
nonfunctional currency.
    (2) Special rules for currency swaps.
    (3) Amortization of swap premium or discount in the case of off 
market swaps.
    (4) Treatment of taxpayer disposing of a currency swap.
    (5) Examples.
    (6) Special effective date for rules regarding currency swaps.
    (7) Special rules for currency swap contracts in hyperinflationary 
currencies.
    (f) Substance over form.
    (1) In general.
    (2) Example.
    (g) Effective date.

            Sec. 1.988-3  Character of exchange gain or loss.

    (a) In general.
    (b) Election to characterize exchange gain or loss on certain 
identified forward contracts, futures contracts and option contracts as 
capital gain or loss.
    (1) In general.
    (2) Special rule for contracts that become part of a straddle after 
the election is made.
    (3) Requirements for making the election.
    (4) Verification.
    (5) Independent verification.
    (6) Effective date.
    (c) Exchange gain or loss treated as interest.
    (1) In general.
    (2) Exchange loss realized by the holder on nonfunctional currency 
tax exempt bonds.
    (d) Effective date.

     Sec. 1.988-4  Source of gain or loss realized on a section 988 
                              transaction.

    (a) In general.
    (b) Qualified business unit.
    (1) In general.
    (2) Proper reflection on the books of the taxpayer or qualified 
business unit.
    (c) Effectively connected exchange gain or loss.
    (d) Residence.
    (1) In general.
    (2) Exception.
    (3) Partner in a partnership not engaged in a U.S. trade or business 
under section 864(b)(2).
    (e) Special rule for certain related party loans.
    (1) In general.
    (2) United States person.
    (3) Loans by related person.
    (4) 10 percent owned foreign corporation.
    (f) Exchange gain or loss treated as interest under Sec. 1.988-3.
    (g) Exchange gain or loss allocated in the same manner as interest 
under Sec. 1.861-9T.
    (h) Effective date.

           Sec. 1.988-5  Section 988(d) hedging transactions.

    (a) Integration of a nonfunctional currency debt instrument and a 
Sec. 1.988-5(a) hedge.
    (1) In general.
    (2) Exception.
    (3) Qualifying debt instrument.
    (4) Section 1.988-5(a) hedge.
    (5) Definition of integrated economic transaction.
    (6) Special rules for legging in and legging out of integrated 
treatment.
    (7) Transactions part of a straddle.
    (8) Identification requirements.
    (9) Taxation of qualified hedging transactions.
    (10) Transition rules and effective dates.
    (b) Hedged executory contracts.
    (1) In general.
    (2) Definitions.
    (3) Identification rules.
    (4) Effect of hedged executory contract.
    (5) References to this paragraph (b).
    (c) Hedges of period between trade date and settlement date on 
purchase or sale of publicly traded stock or security.
    (d) [Reserved]
    (e) Advance rulings regarding net hedging and anticipatory hedging 
systems.
    (f) [Reserved]
    (g) General effective date.

[T.D. 8400, 57 FR 9177, Mar. 17, 1992, as amended by T.D. 8860, 65 FR 
2028, Jan. 13, 2000]