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Title 26, Internal Revenue CodeRelease 119-110

§985 Functional Currency

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

Last updated Sep 22, 2026|Official source

Summary

Tax decisions must be made in the taxpayer’s functional currency unless regulations say otherwise. Functional currency is usually the dollar. For a qualified business unit, it is the currency of the economic area where most of the unit’s activity happens and that the unit uses in its books; if most activity is in dollars, use the dollar. A taxpayer may elect the dollar for such a unit if its books are in dollars or its accounting approximates separate transactions. That election applies from the year made and later years unless revoked with the Secretary’s consent. Any change in functional currency is treated as a change in accounting method for section 481 under rules the Secretary sets.

Full Legal Text

Title 26, §985

Internal Revenue Code, Source: USLM XML via OLRC

(a)In general
Unless otherwise provided in regulations, all determinations under this subtitle shall be made in the taxpayer’s functional currency.
(b)Functional currency
(1)In general
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)Functional currency where activities primarily conducted in dollars
The functional currency of any qualified business unit shall be the dollar if activities of such unit are primarily conducted in dollars.
(3)Election
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.
Any such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(4)Change in functional currency treated as a change in method of accounting
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

Sep 22, 2026

Release point: 119-110