Section 988 Loss

[tracadero]

Hello,

I had a certificate of deposit account at a foreign bank with foreign currency. The purpose of this account was investment reasons and to earn interest. However, things did not go as planned. I had significant losses due to devaluation of that foreign currency against USD. Then I closed the account in 2021 and transferred the remaining amount to the US in 2021. This is not a personal transaction as per Section 988. Can this transaction be treated as a Section 988 loss?

Thanks!

[MinhT1]

The acquisition of a debt instrument or becoming the obligor under a debt instrument and the disposition of nonfunctional currency are considered by the IRS as Section 988 transactions.

As you have realized the loss on that transaction by converting the foreign currency into USD, that loss is deductible. The loss is ordinary in character and is subject to the netting rule.

Please read this IRS document for more information.

As this loss occurred in 2021, you cannot deduct it on your 2022 tax return, but will have to amend your 2021 tax return.

Please read this TurboTax Help article on amending your 2021 Federal tax return.

@tracadero @mAMYiyVS1e   I have edited my answer

[Edited 03/20/2023 | 12:49 PM PST]

[mAMYiyVS1e]

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@MinhT1 wrote:

No.

 Section 988 covers short-term foreign exchange contracts like spot Forex trades and options for Forex traders.

Your loss is a conversion loss not resulting from a section 988 transaction and cannot be considered as a section 988 loss.

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What's the difference between a conversion and a spot Forex trade transaction?

In the following discussion, the OP also converted foreign currencies to USD, and the OP was not engaging in active forex trading either:

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/q-about-section-988-f...

In particular, the Tax Expert @DaveF1006 suggested that the OP from the above post should treat such transactions as Section 988 transactions. What's the difference between that post and this post?