The U.S. Dollar is particularly strong right now, especially when compared to the Euro or British Pound. Consequently, some U.S. taxpayers may have substantial unrealized Code §§987 and 988 currency losses. In recognition of this fact, the IRS shrewdly released new temporary and final regulations in December of 2016 that can limit the recognition of currency losses. See T.D. 9794 and T.D. 9795.
Taxpayers should remember that recognition of significant currency losses can cause such transactions to be reportable transactions. A reportable transaction is “any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.” Code §6707A(c)(1).
There are several different types of reportable transactions. One type of reportable transaction is a loss transaction. Treas. Reg. §1.6011-4(b)(5)(i). The general rule for individuals is that a transaction is a loss transaction only if the loss is at least $2 million in a single taxable year. Treas. Reg. §1.6011-4(b)(5)(i)(D). However, the threshold is only $50,000 in a single year if the loss arises from a section 988 transaction. Treas. Reg. §1.6011-4(b)(5)(i)(E). Note that a section 988 transaction flowing to an individual through an S corporation or partnership would be included when determining whether the $50,000 threshold is exceeded. Id.
Interestingly, Code §987 currency losses are not subject to the reduced threshold of $50,000.
The IRS requires Form 8886, Reportable Transaction Disclosure Statement, to be filed if a taxpayer has any reportable transactions during the taxable year. The form is two pages long and relatively simple the complete. The form needs to be attached to the taxpayer’s tax return. In addition, the taxpayer needs to send a copy of the form to the Office of Tax Shelter Analysis (“OTSA”). The taxpayer can be subject to penalties if the form it is not attached to the tax return or a copy of the form is not sent to OTSA. Treas. Reg. §1.6011-4(d).
If an individual fails to properly file Form 8886 to report a loss transaction, a minimum penalty of $5,000 and a maximum penalty of $10,000 can apply. Code §6707A(b)(2)(B), (3). There is no reasonable cause exception to the penalty. If the IRS imposes the penalty, the taxpayer may petition the IRS to rescind the penalty. Code §6707A(d)(1).