IRS Eases Foreign Currency Gain and Loss Rules

Notice 2026-17, released on Feb. 25, provides a preview of forthcoming proposed regulations that would modify the 2024 final regulations under Section 987. The notice provides an elective, streamlined approach for computing foreign currency gain or loss, refines the loss limitation framework, and previews an election for controlled foreign corporations (CFCs) to opt out of recognizing remittance-based foreign currency gain or loss.

Background

Section 987 applies when a taxpayer owns a qualified business unit (QBU) that has a functional currency that differs from the owner’s functional currency. Section 987(1) and (2) require the owner to compute the QBU’s taxable income or loss in the QBU’s currency and then translate the result into the owner’s functional currency using prescribed exchange rates. Section 987(3) requires recognition of foreign currency gain or loss on transfers between QBUs with different functional currencies. Foreign currency gain or loss generally is recognized when the QBU makes a remittance.

The initial proposed regulations under Section 987, which were issued in 1991, provided a pool-based approach for computing foreign currency gains and losses that remained the informal standard due to its relative simplicity. Final regulations released in 2016 and 2024 shifted toward greater precision by implementing an asset-by-asset approach. The 2024 regulations, generally effective for taxable years beginning after Dec. 31, 2024, require tracking the historical basis of individual assets and liabilities. The 2024 regulations include a current rate election (CRE) to mitigate some of the compliance challenges. However, making the election could suspend losses under a loss-to-the-extent-of-gain rule, which would defer the recognition of currency losses until the taxpayer recognizes offsetting gain of the same character and source. Notice 2026-17 addresses compliance and tracking concerns under the 2024 regulations.

Key provisions of Notice 2026-17

Equity and basis pool election

The notice allows taxpayers to elect to compute Section 987 gains and losses using an equity and basis pool method substantially similar to the 1991 proposed regulations. The method operates by maintaining two aggregate pools for each QBU instead of tracking the marked status of every asset and liability. Under the election, the QBU owner maintains an equity pool in the QBU’s currency (translated at the year-end spot rate) and a basis pool in the owner’s functional currency. Taxpayers can determine net unrecognized Section 987 gain or loss at year-end by comparing the translated equity pool to the basis pool with certain adjustments.

The notice includes transition rules for establishing opening equity and basis pools at the relevant transition or election date. The election can be used only in a year in which a CRE is in effect, and it does not apply to certain QBUs owned through partnerships or S corporations.

Recognition generally is determined by multiplying net unrecognized Section 987 gain or loss by a remittance proportion, which reflects the ratio of the net remittance to the QBU’s total equity pool for the year (including liabilities). The notice permits taxpayers to determine net remittance from a QBU to its owner on an annual basis rather than using the daily netting convention required under the 1991 proposed regulations. Although interim transfers are translated at spot rates when made, Section 987 gain or loss is recognized only annually based on the net movement.

Crowe observation

The notice’s pool framework and annual computation for remittances should be easier to automate in financial and tax reporting systems because it tracks the QBU’s net investment position directly.

Loss suspension rules

Under the notice, CRE loss suspension applies to a Section 987 QBU only if the remittance proportion for the year exceeds 5% or if the net unrecognized (or deferred) loss that would be suspended exceeds $5 million. In addition, recognition groupings for releasing suspended losses are collapsed into a single grouping for most taxpayers. However, CFC owners would use four groupings aligned to tentative tested income, subpart F income groups, Section 952(b) effectively connected income, and other income.

Crowe observation

Fewer groupings should reduce trapped losses that can arise from basket-by-basket tracking.

CFC election

Notice 2026-17 also previews future guidance on an election under which CFCs generally would not recognize currency gain or loss under Section 987(3) on remittances from QBUs with a different functional currency. A transition rule would allow preelection unrecognized gain or loss to be recognized over a 120-month period. Certain inbound transactions involving electing CFCs would be subject to special Section 987 basis increase rules designed to recapture gain that would otherwise remain unrecognized.

Other changes

The successor deferral rules are clarified to ensure they do not apply more broadly than intended. Additionally, the definition of Section 987 hedging is extended to include certain hedges not accounted for under generally accepted accounting principles, with limited identification relief for hedges entered before April 26, 2026.

Applicability date and reliance

The rules under the notice generally apply to tax years ending on or after the date final regulations are published. However, taxpayers generally can rely on the notice’s equity and basis pool election and changes to the loss limitation rules for tax years beginning after Dec. 31, 2024. The notice’s CFC election rules cannot be relied on currently.

Looking ahead

Notice 2026-17 reflects a recalibration of the Section 987 regime, acknowledging the complexity and administrative burden under the 2024 final regulations. Taxpayers should work closely with their tax advisers to model the impact of the equity and basis pool election and the refined loss suspension rules for the 2025 filing season. Although the new CFC election is not yet eligible for reliance, taxpayers also should begin evaluating how it could affect their broader international profile.