IRS proposes major simplifications to §987 foreign currency rules
IRS Notice 2026-17
The IRS is planning to make it easier for taxpayers to calculate §987 foreign currency gains and losses, loosen some loss limitation rules, and may let many CFCs choose not to recognize §987 foreign currency gains and losses at all.
Overview
Notice 2026-17 describes proposed rules that would make it much easier to follow the §987 foreign currency rules. The IRS is responding to ongoing complaints that the current rules are too complicated, costly, and require too much tracking.
The biggest change is a new optional “equity and basis pool” method, based on the 1991 proposed rules that were later withdrawn. Treasury and the IRS also want to limit loss suspension rules, make recognition requirements simpler, expand hedging relief, and create an option that would mostly remove §987(3) gain and loss recognition for CFCs.
What §987 Does
Section 987 applies when a taxpayer owns a qualified business unit (QBU), such as a foreign branch, that uses a different functional currency than its owner. The rules govern:
Translation of branch income and loss.
Recognition of foreign currency gains and losses.
Currency effects when funds move between the branch and its owner.
The 2024 final regulations generally became applicable to tax years beginning after December 31, 2024, and introduced detailed computational and loss-limitation rules.
Proposal
The IRS announced its intent to issue proposed regulations that would:
Create an elective, simplified equity-and-basis pool method.
Narrow the scope of §987 loss suspension rules.
Simplify suspended loss recognition.
Expand eligible §987 hedging transactions.
Develop a separate election under which CFCs generally would not recognize §987(3) foreign currency gains and losses.
Why It Matters
This is one of the most significant taxpayer-friendly developments under §987 since the 2024 regulations were finalized.
The proposed equity and basis pool method revives concepts many multinational taxpayers already understand from the 1991 proposed regulations.
The loss suspension changes would allow more ordinary-course remittances to generate currently recognized losses.
The planned CFC election could dramatically reduce compliance burdens for multinational groups with foreign branches.
Treasury is signaling a willingness to prioritize administrability over technical precision in certain areas of the §987 regime.
Key Changes
1. New elective equity and basis pool method
Treasury and the IRS intend to permit taxpayers to elect a simplified method based on the framework used in the 1991 proposed regulations.
Under the proposed method:
Taxable income or loss would generally be translated using the average exchange rate for the year.
Taxpayers would maintain:
an equity pool in the QBU’s currency, and
a basis pool in the owner’s currency.
§987 gain or loss would be computed by comparing the translated equity pool to the basis pool.
Taxpayers would perform a single annual remittance calculation instead of tracking remittances daily.
The annual remittance calculation is particularly important because it eliminates one of the more administratively difficult features of the 1991 regulations, which required daily remittance tracking.
The election would only be available when a current rate election is already in effect.
2. Loss suspension rules become much narrower
The current regulations generally suspend many §987 losses recognized under a current rate election. Treasury received substantial criticism that these rules are overly broad.
The planned regulations would apply the loss suspension rules only if either:
The remittance proportion exceeds 5%; or
The amount that would become suspended exceeds $5 million.
This is a substantial relaxation compared with the current framework and should permit recognition of many losses arising from routine branch operations.
3. Recognition grouping rules become much simpler
Current regulations require taxpayers to track gains and losses across multiple recognition groupings, creating significant complexity.
Treasury intends to simplify the rules by treating all §987 gains and losses as belonging to a single recognition grouping for most taxpayers.
For CFCs, four broader groupings would remain:
Tentative tested income.
Subpart F income.
Effectively connected income excluded under §952(b).
Other income.
This change would make it easier to use recognized gains to unlock previously suspended losses.
4. Expanded hedging relief
Current §987 hedging rules require compliance with a GAAP-based hedging standard. Treasury received comments that the rule excludes many legitimate economic hedges.
The planned regulations would allow additional hedges to qualify as §987 hedging transactions even when the GAAP hedging requirement is not satisfied, provided the hedge is primarily used to manage exchange-rate risk relating to the QBU investment.
This expansion could significantly increase the number of hedges eligible for favorable §987 treatment.
5. Proposed CFC election
The most consequential proposal may be Treasury’s planned election for controlled foreign corporations.
If elected:
CFCs generally would not compute or recognize foreign currency gain or loss under §987(3).
§987(1) and §987(2) would continue to apply for taxable income and earnings and profits calculations.
Special rules would apply to certain inbound reorganizations and liquidations.
Treasury specifically stated that it intends to issue additional guidance soon enough to allow taxpayers to evaluate the election for 2025 returns filed on extension.
Scope and Limitations
The notice does not change the current law by itself.
Instead, it explains rules that Treasury expects to include in future proposed regulations. Taxpayers can rely on the rules in Sections 3 and 4 of the notice before the proposed regulations come out, as long as everyone in the taxpayer’s §987 electing group uses the rules fully and consistently. The planned CFC election rules are not yet available to rely on.
What Practitioners Should Watch
Multinationals with foreign branch structures should evaluate whether the equity-and-basis-pool method would reduce compliance costs.
Taxpayers currently affected by suspended §987 losses may find substantially greater flexibility under the proposed rules.
Groups with significant CFC operations should closely monitor forthcoming guidance on the proposed CFC election.
Existing hedging programs may warrant review because more transactions could qualify for §987 hedge treatment.
The Takeaway
Notice 2026-17 marks a clear change in how Treasury is handling §987. Instead of adding more complex rules, the government is aiming for simplification. For many multinational taxpayers, especially those with foreign branches through CFCs, these changes could significantly reduce compliance costs and simplify administration.