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The short answer
For a US company whose functional currency is the dollar, naira deposits, naira receivables and payables and naira loans are Section 988 transactions. Gain or loss caused by exchange-rate movement between the booking date and the payment date is computed separately and treated as ordinary income or loss, not capital, under 26 USC 988(a)(1)(A).
A US company that invoices Nigerian customers, pays a Lagos team or keeps money in a Nigerian bank account will see the dollar value of its naira move every week. The accounting software shows that movement as a currency gain or loss. The tax question is narrower: which of those movements the Internal Revenue Code taxes, when, and in which basket. The answer sits in Section 988 of the Code. This guide walks through what the statute itself says, using the text published by Cornell's Legal Information Institute, and is information rather than tax advice.
What counts as a Section 988 transaction
Section 988(c)(1)(A) covers a transaction where the amount the taxpayer is entitled to receive, or required to pay, is denominated in a nonfunctional currency or determined by reference to one. For a company whose books and tax returns are kept in dollars, the naira is a nonfunctional currency. The IRS foreign currency page confirms that US tax returns are reported in dollars and that a business's functional currency is generally the US dollar.
Section 988(c)(1)(B) then lists the transactions that qualify:
- Debt: acquiring a naira debt instrument, or becoming the obligor under one (for example a naira loan to or from a Nigerian subsidiary).
- Accruals: accruing income or expense in naira that is paid or received later, such as a naira invoice to a Lagos client or a naira supplier bill.
- Financial instruments: entering into a forward, futures, option or similar contract tied to the naira.
- Holding and spending naira: under 988(c)(1)(C), disposing of nonfunctional currency is itself a Section 988 transaction, and nonfunctional currency includes naira demand or time deposits, not just notes and coins.
That last point matters most in practice. Money sitting in a naira current account at a Nigerian bank is nonfunctional currency. Each time the company converts it to dollars, pays a naira bill from it or moves it, it disposes of some of that currency, and a gain or loss can arise.
When the gain or loss is measured
Section 988(b) limits foreign currency gain or loss to the part caused by changes in exchange rates between two dates. The booking date, under 988(c)(2), is the date a debt is acquired or the obligation arises, or the date an item is accrued or otherwise taken into account. The payment date, under 988(c)(3), is the date payment is made or received. The statute speaks of gain "realized" by reason of exchange-rate changes, which is why the tax computation follows settled transactions, while month-end revaluations in the books are a reporting step. Ask your preparer how any unrealised book movements should be reconciled to the return.
Ordinary, not capital
Section 988(a)(1)(A) says the gain or loss is computed separately and treated as ordinary income or loss. A naira loss therefore offsets ordinary business income rather than sitting in the capital-loss basket. Section 988(a)(1)(B) allows a capital election only for certain forward, futures and option contracts that are capital assets, are not part of a straddle, and are identified before the close of the day the contract is entered into. Ordinary naira balances and invoices do not qualify for that election.
Source
Under 988(a)(3), unless regulations provide otherwise, the source of the gain or loss is determined by the residence of the taxpayer or of the qualified business unit on whose books the item is reflected. That is relevant to foreign tax credit calculations and is a point to raise with your preparer if the naira activity runs through a Nigerian branch.
A worked example
The rates below are invented for the example only. Never use them as current rates.
| Step | Naira | Example rate (₦ per $1) | Dollar value |
|---|---|---|---|
| 1 March: invoice a Lagos client (accrual booked) | ₦15,000,000 | 1,500 | $10,000.00 |
| 30 April: client pays into the naira account | ₦15,000,000 | 1,600 | $9,375.00 |
| Loss on the receivable (accrual transaction) | ($625.00) ordinary loss | ||
| 31 May: convert the whole balance to dollars | ₦15,000,000 | 1,550 | $9,677.42 |
| Gain on disposing of the naira deposit | $302.42 ordinary gain |
Two separate Section 988 transactions happen here. The receivable was booked at $10,000 and collected when the naira was worth $9,375, so the company has a $625 ordinary loss. The naira then sat in the bank with a dollar basis of $9,375, and converting it a month later at a better rate produced $9,677.42, a $302.42 gain. Net, the company is $322.58 worse off than the original invoice value, and both pieces are ordinary.
Rates, records and hedges
The IRS says it has no official exchange rate and accepts any posted rate used consistently; its page lists sources including banks, US embassies, the Treasury, the Federal Reserve and commercial providers. For naira, where official and parallel rates have at times differed, document which rate you used for each booking and payment date and why. Keep the bank confirmation of each conversion, since the actual rate achieved is the best evidence of the payment-date amount.
If you hedge naira exposure, Section 988(d) lets regulations integrate a qualifying hedge with the underlying transaction where it was entered into primarily to manage currency risk and is identified as a 988 hedging transaction. Few small companies hedge naira, but if you do, the identification step needs to be done at the time.
What to check first
- Confirm the company's functional currency is the dollar and whether any Nigerian branch keeps its own books.
- List every naira item: bank balances, receivables, payables, intercompany loans.
- Record a booking-date and payment-date rate for each, from one consistent source.
- Separate realised gains and losses from month-end revaluations before the tax return is prepared.
- Ask a US tax adviser how the figures enter your return; this article is information only.
Where Pryme fits
A Pryme Business Account holds NGN and USD side by side, so naira stays naira until you choose to convert with Swap, which shows the rate and the fee before you approve. That gives each conversion a dated record with the rate achieved. The Finance agent can prepare a list of conversions and receipts for your bookkeeper, and a person approves anything above the ceiling you set. For the bookkeeping side, see multicurrency bookkeeping for a US and Nigeria business.
Questions people ask
Is a naira exchange loss deductible for a US company?
Under Section 988(a)(1)(A), foreign currency loss on a Section 988 transaction is treated as an ordinary loss, so for a company it generally reduces ordinary income. Confirm the treatment with your tax adviser.
Do I pay tax on unrealised naira gains at year end?
Section 988 measures gain realised by reason of exchange-rate changes between booking and payment dates. Month-end revaluation in your books is a reporting step; ask your preparer how it is adjusted on the return.
Which naira exchange rate should I use for IRS purposes?
The IRS has no official rate and accepts any posted rate used consistently. For actual conversions, the rate on your bank confirmation is the strongest evidence.
Does the $200 personal exemption apply to my company?
No. Section 988(e) covers personal transactions of individuals only. A company's naira balances used in its trade or business fall under the general rules.
Sources
- Cornell LII: 26 U.S. Code section 988, Treatment of certain foreign currency transactions · accessed Oct 2026
- IRS: Foreign currency and currency exchange rates (updated 22 May 2026) · accessed Oct 2026
This article is general information, not financial, legal or tax advice. Products described are provided under the terms on this site and are subject to regulation and eligibility.