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A 988 transaction refers to 26 USCA Section 988[1] of the Internal Revenue Code in the United States of America. This transaction occurs when a taxpayer enters into or acquires any debt instrument, forward contract, futures contract, option, or similar financial instrument held in a non-functional currency.[1] It shall not apply to any regulated futures contract or non-equity options which would be marked to market under 26 USCA § 1256[2] (1256 contract) if held on the last day of the taxable year.[1]
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The tax reforms of 1986 instituted the provisions covering 988 transactions.[3]
The foreign currency gain or loss on a 988 transaction is treated as ordinary income or loss unless an election is made to treat it as a capital gain or loss.[1]