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In this morning’s Tax Notes (subscription required), Jeremiah Coder addresses a topic that we at the Tax Blawg have discussed a couple of times over the past two years: the tax consequences of a potential breakup of the euro. For our prior coverage, see here and here. As the currency lurches towards and away from a potential dissolution (in part or in whole), the tax fallout of such an event lurks in the background.
The Tax Notes article generally covers the major tax issue (e.g., currency gain/loss recognition) associated with a potential breakup of the euro. As the article seemed to suggest, though, the uncertainty about how Treasury would respond to a breakup is probably just as great as the uncertainty about whether the currency itself will survive, at least with its current composition.
The inability of Treasury to provide meaningful ex ante guidance about the tax consequences of a euro breakup is probably driven less by technical constraints than by political ones. In the event of a breakup, Treasury would likely treat the conversion of a euro-denominated instrument into a legacy-denominated instrument as a non-event for tax purposes, thereby avoiding the recognition of gain or loss upon the forced conversion. This would be the same route Treasury chose at the euro's inception. See Treas. Reg. § 1.1001-5.
Although taxpayers would welcome the announcement of such a rule ahead of any euro breakup, diplomatic considerations probably limit Treasury’s ability to provide that level of comfort. If Treasury were to issue preemptively any kind of guidance about the tax consequences of a euro breakup, they would likely be accused of hastening the currency’s demise merely by acknowledging the likelihood of such a demise occurring. Consequently, taxpayers will likely have to wait until a breakup occurs, if at all, to receive any guidance from Treasury about its U.S. income tax consequences.