Income from an exchange gain (or loss) from a taxpayer’s dealings in “nonfunctional currency” is usually sourced to the taxpayer’s “residence.” “Nonfunctional currency” is currency other than the official currency of the taxpayer’s country where she/it performs most of her/its activities. The term “residence” in this context refers to and individual’s “tax home” (or, if she has no tax home, country of citizenship). IRC §911(d). Entities are residents in the U.S. if they are formed in any state in the union.
NOTIONAL PRINCIPAL CONTRACTS
Income from “notional principal contracts” (NPCs) or swaps is generally sourced by the residence of the recipient. (Note: This rule excludes foreign currency swaps, which are governed by IRC §988). Thus, if a nonresident alien receives income from a swap or under an NPC the income is foreign source. However, it is presumed that income from NPCs that is “effectively connected” with the recipient’s U.S. trade or business has a U.S. source.
INCOME FROM SPACE AND OCEAN ACTIVITY
The income from activities conducted in space (e.g. satellites) has a U.S. source if it is derived by a U.S. person or entity, and a foreign source if derived by a foreign person or entity. Similarly, income from activities conducted on or under water outside U.S. jurisdiction, a U.S. possession, or a foreign country, or Antarctica has a U.S. source if derived by a U.S. person or a foreign source if derived by a foreign person or entity.
HOW ARE SALES OF PERSONAL PROPERTY SOURCED?
The rules for sales of personal property are complex but generally, the source for income from the sale of personal property (excluding inventory but including shares of corporate stock) is determined by the seller’s residence (seller can be entity or person). However, a citizen or resident alien is a “non-resident” under IRC §865 if the income derived from selling the personal property is subject to a foreign tax amount of at least 10% of the gain. In this context, for individuals, a seller is a “resident” of the U.S. when she is either a citizen or resident alien of the U.S. without a “tax home” (IRC § 911(d)) outside the U.S., or is a nonresident alien with a tax home within the U.S. Also, a corporation, trust, or estate that is a U.S. person is a “resident” within this context (IRC §865).
A special source rule exists for selling certain foreign affiliate stock. Income from the sale of foreign affiliate stock has a foreign source if the foreign affiliate derives more than 50% of its income from an active trade or business in a foreign country in the three years leading up to its sale.
Note: the source rules for income from inventory, intangible property (e.g. a license), and depreciable property have different-“location”- rules. See next section.