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Title 26 — Internal Revenue CodeRelease 119-73

§985 Functional currency

Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter N— - Tax Based on Income From Sources Within or Without the United States › Part PART III— - INCOME FROM SOURCES WITHOUT THE UNITED STATES › Subpart Subpart J— - Foreign Currency Transactions › § 985

Last updated Apr 6, 2026|Official source

Summary

Tax decisions must use the taxpayer’s functional currency unless regulations say otherwise. Functional currency is usually the U.S. dollar, but a qualified business unit (QBU) may use the currency of its economic environment if that is what its books use. A QBU is treated as using dollars if most activity is in dollars. A taxpayer may choose the dollar for a QBU if the QBU keeps books in dollars or the taxpayer’s accounting approximates separate transactions. Any change in functional currency is treated as a change in accounting method under section 481 and follows procedures set by the Secretary.

Full Legal Text

Title 26, §985

Internal Revenue Code — Source: USLM XML via OLRC

(a)Unless otherwise provided in regulations, all determinations under this subtitle shall be made in the taxpayer’s functional currency.
(b)(1)For purposes of this subtitle, the term “functional currency” means—
(A)except as provided in subparagraph (B), the dollar, or
(B)in the case of a qualified business unit, the currency of the economic environment in which a significant part of such unit’s activities are conducted and which is used by such unit in keeping its books and records.
(2)The functional currency of any qualified business unit shall be the dollar if activities of such unit are primarily conducted in dollars.
(3)To the extent provided in regulations, the taxpayer may elect to use the dollar as the functional currency for any qualified business unit if—
(A)such unit keeps its books and records in dollars, or
(B)the taxpayer uses a method of accounting that approximates a separate transactions method.
(4)Any change in the functional currency shall be treated as a change in the taxpayer’s method of accounting for purposes of section 481 under procedures to be established by the Secretary.

Legislative History

Notes & Related Subsidiaries

Statutory Notes and Related Subsidiaries

Effective Date

Pub. L. 99–514, title XII, § 1261(e), Oct. 22, 1986, 100 Stat. 2591, provided that: “(1) In general.—Except as provided in paragraph (2), the

Amendments

made by this section [enacting this subpart and amending section 1092 and 1256 of this title] shall apply to taxable years beginning after December 31, 1986. “(2) Special rules for purposes of section 902 and 960.—For purposes of applying sections [former] 902 and 960 of the Internal Revenue Code of 1986, the

Amendments

made by this section shall apply to—“(A) earnings and profits of the foreign corporation for taxable years beginning after December 31, 1986, and “(B) foreign taxes paid or accrued by the foreign corporation with respect to such earnings and profits.”

Reference

Citations & Metadata

Citation

26 U.S.C. § 985

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73