Some countries put restrictions on currency, effectively ‘blocking the income’ from being readily convertible into other currencies, including U.S. dollars.  Such currency control was recently in place in Argentina, where one could not legally convert Argentinian Pesos into U.S. dollars; this was lifted by the new Argentinian President Mauricio Macri.

Blocked income is when “because of restrictions in a foreign country, your income is not readily convertible into U.S. dollars or into other money or property that is readily convertible into U.S. dollars, your income is “blocked” or ‘deferrable’ income.”  The IRS provides two ways for you to meet your reporting obligations if your income is blocked.  The first is to report the income and pay your income tax with U.S. dollars that are available to you in the United States or other countries.  The second is to postpone reporting the income until it becomes unblocked.  Income is considered unblocked and reportable when it becomes convertible or is actually converted into U.S. dollars or any money or property that is convertible into U.S. dollars.  Using the blocked income for personal expenses or disposing of it by gift, bequest or devise makes the income unblocked and thereby reportable.

While the income is blocked you must file an information return with your tax returns using another Form 1040 labeled “Report of Deferrable Foreign Income, pursuant to Rev. Rul 74-351.”  You must declare on the information return that you will include the deferrable income in your taxable income in the year it becomes unblocked and finally that you must also state that you waive any right to claim that the deferrable income was includible in your income for any earlier year.

Special rules are in place regarding blocked income and controlled foreign corporations (“CFC”).  For the purposes of calculating Subpart F Income, pursuant to IRC § 964(b), a CFC’s earnings and profits do not include the portion that cannot be distributed to U.S. shareholders because of currency or other restrictions or limitations of a foreign country (effectively, ‘blocked income’).  Pursuant to Treasury Regulation § 1.964-2(b)(1), the restrictions must exist for a 150-day period that starts 90 days before the CFC’s year end and ends at least 60 days after it.  If earnings and profits that are blocked are distributed in a foreign country to one or more U.S. shareholders of a CFC, those earnings are no longer considered blocked and are reportable.  A U.S. shareholder, however, can still make the election to defer the blocked foreign income until the income ceases to be blocked. Treasury Regulation § 1.964-2(c)(3).  Finally, when restrictions are removed, the earnings and profits are included as earnings and profits for the CFC in the year they were derived, not the year in which the restrictions were removed, but they are to be translated into U.S. dollars at the exchange rate for the translation period during which the restrictions were removed.  Treasury Regulation § 1.964-2(c)(1)(ii).