Treasury and IRS Announce New Election for Foreign Currency Gain and Loss Reporting

WASHINGTON — The Treasury Department and the Internal Revenue Service on February 25, 2026, announced significant modifications to how U.S. companies with foreign operations calculate currency gains and losses, offering new elections intended to simplify a notoriously complex area of tax law. The changes, detailed in Notice 2026-17, will allow certain taxpayers to use a simplified method for determining gains and losses under Section 987 and preview a future election that could exempt many controlled foreign corporations from the requirement altogether.

This move toward simplification is a significant development for U.S. businesses operating internationally, but the introduction of new elective regimes adds another layer of strategic decision-making. In our experience, the complexity of Section 987 has long been a major compliance headache for mid-sized companies expanding abroad. While these new options are welcome, they require careful analysis to determine the most advantageous path forward, as the default rules may not be optimal for every business structure.

The centerpiece of the notice is an election to use an “equity and basis pool method” for determining taxable income and foreign currency gain or loss. According to the notice, this method is substantially similar to a framework first proposed in 1991 regulations. Under this approach, the owner of a qualified business unit (QBU)—a separate and distinct business operation with a functional currency different from its U.S. owner—will maintain two pools: an equity pool in the QBU’s functional currency and a basis pool in the owner’s currency. These pools are adjusted annually for income, losses, and transfers, providing a streamlined mechanism for tracking and calculating currency effects.

This elective method is an alternative to the more complex framework established in the final Section 987 regulations issued in December 2024, which are generally applicable for tax years beginning after December 31, 2024. Taxpayers who previously used the 1991 proposed method should be aware that their historical equity and basis pools may not carry over directly, as the new election requires opening balances to be determined by the QBU’s tax basis net value on the relevant date, according to analysis from GTM Tax.

Perhaps more impactful for many multinational businesses, the notice also signals forthcoming guidance that will establish an election for controlled foreign corporations (CFCs). This “CFC election” would allow these entities to generally not compute or recognize foreign currency gain or loss under Section 987(3) on remittances from their QBUs. The IRS notice states that while the rules for computing taxable income and earnings and profits under Sections 987(1) and (2) would still apply, the often-burdensome process of calculating currency gain on intercompany fund movements would be eliminated for electing CFCs.

The CFC election is a direct response to comments the Treasury and IRS received recommending that Section 987(3) not apply to CFCs. This proposed change could drastically reduce the compliance burden for many U.S. parent companies. Navigating these international tax provisions is a core part of our tax preparation and compliance services. The choice of whether to adopt the equity pool method or, when available, the CFC election, can have material consequences on a company's global tax liability. We help clients model these outcomes to ensure their tax strategy aligns with their operational reality. For assistance with these complex foreign currency rules, businesses can contact C&S Finance Group LLC at csfinancegroup.com.

The IRS has indicated it intends to issue this guidance in the near future to give taxpayers enough time to decide whether to make the CFC election for their 2025 tax year. However, the notice explicitly states that taxpayers may not rely on the rules surrounding the CFC election until that future guidance is formally issued.

Beyond these two major elections, Notice 2026-17 also previews other targeted changes. These include narrowing certain loss suspension and recognition rules from the 2024 final regulations and clarifying definitions for successors and hedging transactions. Forvis Mazars noted that the notice provides a timing rule treating certain hedges as timely identified if the hedge and related QBU are properly documented by April 26, 2026. Treasury and the IRS are expected to further clarify the definition of a Section 987 hedging transaction, which is intended to be broader than the definition under Generally Accepted Accounting Principles (GAAP).

Section 987 rules apply specifically to the translation of income and assets from a branch or disregarded entity that uses a different functional currency than its owner. This should not be confused with Section 988, which governs the treatment of specific foreign currency transactions, such as making or receiving payments in a nonfunctional currency. Gains or losses under Section 987 are generally classified as ordinary income for federal tax purposes. While these changes aim for simplification, the interaction between the 2024 final regulations and these new elective methods creates a complex decision tree for businesses. We advise clients that the 'simplest' option on paper is not always the most tax-efficient in practice.

Taxpayers can now rely on the provisions within Notice 2026-17, except for the forthcoming CFC election, when preparing their 2025 tax returns. Businesses and tax professionals should now monitor for the release of the proposed regulations that will formalize the equity and basis pool method and, most importantly, provide the specific rules and procedures for making the highly anticipated CFC election.