SECTION 5. AFSI ADJUSTMENTS

FOR CERTAIN ITEMS MEASURED AT FAIR VALUE

.01 Purpose . In response to comments, the Treasury Department and the IRS anticipate that the forthcoming proposed regulations will propose modifications to the rules in proposed § 1.56A-24, other than the rules for net investment hedges, that would be consistent with the interim guidance provided in this section 5. The Treasury Department and the IRS are providing this interim guidance prior to the issuance of the forthcoming proposed regulations to provide taxpayers with an alternative approach to determine AFSI with respect to certain gains and losses that are included in FSI but generally are not included in gross income for regular tax purposes. Instead of being limited to AFSI hedges and hedged items as in proposed § 1.56A-24, this interim guidance applies more broadly to certain items that are measured at fair value for FSI purposes. For example, depending on the applicable financial accounting principles, this interim guidance may apply to (1) holdings of digital assets, (2) debt securities that are classified as trading securities, and (3) derivatives that are not part of a hedging transaction, if those items are measured at fair value for FSI purposes but are not marked to market for regular tax purposes. However, this interim guidance does not apply to a partnership

investment, stock in a domestic corporation that is not a member of a tax consolidated group of which the CAMT entity is a member, stock in a foreign corporation, a net investment hedge, an asset or liability entered into as a hedging transaction by a covered insurance company in certain circumstances, a covered insurance company’s assets in a covered investment pool, or a covered insurance company’s covered obligations.

In general, the interim guidance in this section 5 provides that for certain items that are measured at fair value, a CAMT entity may adjust AFSI to disregard gains and losses that are unrealized for regular tax purposes (see section 5.03 of this notice, which describes the FVI exclusion option). The interim guidance in this section 5 also provides that a CAMT entity may adjust AFSI to disregard certain gains and losses for certain AFSI hedges and hedged items (see section 5.04 of this notice, which describes the hedge coordination option).

.02 Definitions . For purposes of this section 5:

(1) Fair value item . The term fair value item means an asset or liability of a CAMT entity for which there are fair value measurement adjustments. The term fair value item does not include- (a) Items subject to § 56A(c)(2)(C), (c) (2)(D), or (c)(3) and the guidance thereunder, including the CAMT Proposed Regulations, Notice 2025-28, and Notice 202546 (for example, the term fair value item does not include a partnership investment, stock in a domestic corporation that is not a member of a tax consolidated group of which the CAMT entity is a member, or stock in a foreign corporation);

(b) Assets or liabilities entered into as a hedging transaction, as described in proposed § 1.56A-24(b)(1)(ii), by a covered insurance company;

(c) A covered insurance company’s assets in a covered investment pool; or

(d) A covered insurance company’s covered obligations.

(2) Fair value measurement adjust- ment . The term fair value measurement adjustment means a change in the value of an asset or a liability due to required periodic determinations at least annually of the increases or decreases in fair value of that asset or liability included

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ognizes unrealized gain or loss in a taxable year and takes such gain or loss into account in the taxable year is made after taking into account any elections made by the CAMT entity and the application of other applicable provisions that may result in unrealized gain or loss not being recognized.

(1) Consistency requirement . A CAMT entity must consistently apply the FVI exclusion option to all fair value items, except for a hedged item or AFSI hedge to which the hedge coordination option in section 5.04 of this notice applies.

(2) Application of FVI exclusion option . (a) In general . Except as provided in section 5.03(2)(b) of this notice, a CAMT entity (or a controlling domestic shareholder of a CFC under section 5.03(4) of this notice) must indicate in a statement attached to its Federal income tax return that the CAMT entity intends to apply the FVI exclusion option for purposes of determining AFSI. The statement must be titled “FVI Exclusion Option for CAMT” and include the CAMT entity’s name, address, taxpayer identification number, and a statement that the CAMT entity is choosing the FVI exclusion option under section 5.03 of Notice 2025-49. The FVI exclusion option will apply for the taxable year beginning after the date on which the CAMT entity files an original or amended Federal income tax return containing that statement.

(b) Transition period . A CAMT entity may apply the FVI exclusion option for purposes of determining AFSI for its first taxable year beginning on any day during 2024, if the CAMT entity indicates in the statement described in section 5.03(2)(a) of this notice, attached to its original or amended Federal income tax return for that taxable year, that the CAMT entity intends to apply the FVI exclusion option for that taxable year. Alternatively, a CAMT entity may apply the FVI exclusion option for purposes of determining AFSI for its first taxable year beginning on any day during 2025, if the CAMT entity indicates in the statement described in section 5.03(2) (a) of this notice attached to its Federal income tax return for that taxable year that the CAMT entity intends to apply the FVI exclusion option for that taxable year.

(3) Duration of FVI exclusion option . A CAMT entity applying the FVI exclu

sion option for a taxable year must continue to apply the FVI exclusion option for purposes of determining AFSI for all subsequent taxable years beginning before the date the forthcoming proposed regulations addressing AFSI adjustments for certain items measured at fair value are published in the Federal Register or until the CAMT entity (or a controlling domestic shareholder of a CFC under section 5.03(4) of this notice) indicates in a statement attached to its Federal income tax return that the CAMT entity intends to no longer apply the FVI exclusion option. The statement must be titled “Cessation of FVI Exclusion Option for CAMT” and include the CAMT entity’s name, address, taxpayer identification number, and a statement that the CAMT entity intends to no longer apply the FVI exclusion option under section 5.03 of Notice 2025-49. The FVI exclusion option ceases to apply for the taxable year beginning after the date on which the CAMT entity files an original or amended Federal income tax return containing that statement.

(4) CFCs . In the case of a CAMT entity that is a CFC, the controlling domestic shareholders (as defined in § 1.964-1(c) (5)) of the CFC must file a statement described in section 5.03(2)(a), (2)(b), or (3) of this notice on behalf of the CFC in accordance with the procedures set forth in § 1.964-1(c)(3). The statement described in § 1.964-1(c)(3)(ii) must be titled “FVI Exclusion Option for CAMT on Behalf of CFC” or “Cessation of FVI Exclusion Option for CAMT on Behalf of CFC,” as applicable, and, in addition to the information set forth in § 1.964-1(c) (3)(ii), must include a statement that the CFC intends to apply or cease to apply the FVI exclusion option under Notice 202549. Applying or ceasing to apply the FVI exclusion option on behalf of a CFC is binding on all United States shareholders (as defined in § 951(b) or, if applicable, § 953(c)(1)(A)) of the CFC.

.04 Hedge coordination option . Provided the requirements described in section 5.04(1) through (4) and 5.05 of this notice are satisfied, if a CAMT entity has a hedged item and a corresponding AFSI hedge that are each marked to market for regular tax purposes, as defined in section 5.03 of this notice, but either the hedged item or the AFSI hedge (but not both)

does not have a fair value measurement adjustment, the CAMT entity may adjust AFSI for a taxable year to disregard the fair value measurement adjustment on the AFSI hedge or hedged item with the fair value measurement adjustment.

(1) Consistency requirement . A CAMT entity that applies the hedge coordination option must apply the option to all transactions involving a hedged item and a corresponding AFSI hedge that are each marked to market for regular tax purposes but either the hedged item or the AFSI hedge (but not both) does not have a fair value measurement adjustment.

(2) Application of hedge coordination option .

(a) In general . Except as provided in section 5.04(2)(b) of this notice, a CAMT entity (or a controlling domestic shareholder of a CFC under section 5.04(4) of this notice) must indicate in a statement attached to its Federal income tax return that the CAMT entity intends to apply the hedge coordination option for purposes of determining AFSI. The statement must be titled “Hedge Coordination Option for CAMT” and include the CAMT entity’s name, address, taxpayer identification number, and a statement that the CAMT entity is choosing the hedge coordination option under section 5.04 of Notice 2025-49. The hedge coordination option will apply for the taxable year beginning after the date on which the CAMT entity files an original or amended Federal income tax return containing that statement.

(b) Transition period . A CAMT entity may apply the hedge coordination option for purposes of determining AFSI for its first taxable year beginning on any day during 2024, if the CAMT entity indicates in the statement described in section 5.04(2)(a) of this notice attached to its original or amended Federal income tax return for that taxable year that the CAMT entity intends to apply the hedge coordination option for that taxable year. Alternatively, a CAMT entity may apply the hedge coordination option for purposes of determining AFSI for its first taxable year beginning on any day during 2025, if the CAMT entity indicates in the statement described in section 5.04(2)(a) of this notice attached to its Federal income tax return for that taxable year that the CAMT

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entity intends to apply the hedge coordination option for that taxable year.

(3) Duration of hedge coordination option . A CAMT entity applying the hedge coordination option for a taxable year must continue to apply the hedge coordination option for purposes of determining AFSI for all subsequent taxable years beginning before the date the forthcoming proposed regulations addressing AFSI adjustments for certain items measured at fair value are published in the Federal Register or until the CAMT entity (or a controlling domestic shareholder of a CFC under section 5.04(4) of this notice) indicates in a statement attached to its Federal income tax return that the CAMT entity intends to no longer apply the hedge coordination option. The statement must be titled “Cessation of Hedge Coordination Option for CAMT” and include the CAMT entity’s name, address, taxpayer identification number, and a statement that the CAMT entity intends to no longer apply the hedge coordination option under section 5.04 of Notice 2025-49. The hedge coordination option ceases to apply for the taxable year beginning after the date on which the CAMT entity files an original or amended Federal income tax return containing that statement.

(4) CFCs . In the case of a CAMT entity that is a CFC, the controlling domestic shareholders of the CFC must file a statement described in section 5.04(2)(a), (2) (b), or (3) of this notice on behalf of the CFC in accordance with the procedures set forth in § 1.964-1(c)(3). The statement described in § 1.964-1(c)(3)(ii) must be titled “Hedge Coordination Option for CAMT on Behalf of CFC” or “Cessation of Hedge Coordination Option for CAMT on Behalf of CFC,” as applicable, and, in addition to the information set forth in § 1.964-1(c)(3)(ii), must include a statement that the CFC intends to apply or cease to apply the hedge coordination option under Notice 2025-49. Applying or ceasing to apply the hedge coordination option on behalf of a CFC is binding on all United States shareholders (as defined in § 951(b) or, if applicable, § 953(c)(1) (A)) of the CFC.

.05 Adjustments for disregarded fair value measurement adjustments . A CAMT entity that disregards a fair value measurement adjustment under the FVI exclusion

option or the hedge coordination option must apply the guidance provided in this section 5.05.

(1) Other adjustments to a CAMT entity’s FSI . If a fair value measurement adjustment disregarded by a CAMT entity under section 5.03 or 5.04 of this notice for a taxable year includes amounts corresponding to items of income, gain, deduction, or loss under chapter 1 of the Code in that taxable year (other than gain or loss from marking to market an item for regular tax purposes), then the CAMT entity includes those amounts in AFSI in that taxable year. See proposed § 1.56A-24(f) (5) ( Example 5 ) for an example of a disregarded fair value measurement adjustment that includes taxable income from original issue discount.

(2) Appropriate adjustments . If a CAMT entity disregards a fair value measurement adjustment from AFSI for a taxable year under section 5.03 or 5.04 of this notice, appropriate adjustments are made to any relevant CAMT attributes (for example, the CAMT basis of the fair value item) to reflect that such fair value measurement adjustment has not been included in AFSI and to reflect any amounts included in AFSI under section 5.05(1) of this notice. (3) Inclusion of disregarded fair value measurement adjustment . In the taxable year of a subsequent adjustment date, the CAMT entity includes in AFSI the cumulative fair value measurement adjustments previously disregarded in determining AFSI under section 5.03 or 5.04 of this notice, net of any amounts included in AFSI under section 5.05(1) of this notice. The CAMT basis and any other relevant CAMT attributes of the fair value item that was subject to section 5.03 or 5.04 of this notice are adjusted to reflect the amounts included in AFSI under this section 5.05(3). Following a subsequent adjustment date, the CAMT entity uses the CAMT basis of the fair value item that was subject to section 5.03 or 5.04 of this notice immediately following the subsequent adjustment date in order to determine any further income, gain, deduction, and loss included in AFSI with respect to the fair value item.

.06 Examples . The following examples illustrate the application of the guidance in section 5.03(2) and (3) of this notice.

For purposes of these examples, X is an applicable corporation and uses the calendar year for its taxable year. The analysis in these examples similarly applies to situations involving the application of the guidance in section 5.04(2) and (3) of this notice.

(1) Example 1: Application of FVI exclusion option .

(a) Facts . X files its 2026 Federal income tax return on April 15, 2027. X indicates in a statement satisfying the requirements of section 5.03(2)(a) of this notice attached to its 2026 Federal income tax return that X intends to apply the FVI exclusion option for purposes of determining AFSI.

(b) Analysis . For purposes of determining the AFSI of X, X will begin to apply the FVI exclusion option for its taxable year beginning January 1, 2028, because this is the taxable year that begins after April 15, 2027, the date on which X filed a Federal income tax return containing a statement indicating its intent to apply the FVI exclusion option.

(2) Example 2: No longer applying the FVI exclusion option .

(a) Facts . X previously indicated in a valid statement attached to its Federal income tax return its intent to apply the FVI exclusion option and has continued to apply the FVI exclusion option. X files its 2027 Federal income tax return on April 15, 2028. X indicates in a statement satisfying the requirements of section 5.03(3) of this notice attached to its 2027 Federal income tax return that X intends to no longer apply the FVI exclusion option for purposes of determining AFSI.

(b) Analysis . For purposes of determining the AFSI of X, X will cease to apply the FVI exclusion option for its taxable year beginning January 1, 2029, because this is the taxable year that begins after April 15, 2028, the date on which X filed its Federal income tax return containing a statement indicating its intent to no longer apply the FVI exclusion option.

.07 Applicability date and reliance . It is anticipated that the forthcoming proposed regulations will provide that rules consistent with the guidance described in this section 5 will apply for taxable years beginning on or after the date the final regulations addressing AFSI adjustments for certain items measured at fair value are published in the Federal Register . For taxable years beginning before the date those forthcoming proposed regulations are published in the Federal Register, taxpayers may rely on the guidance described in this section 5. A CAMT entity’s reliance on the FVI exclusion option or the hedge coordination option to determine AFSI for a taxable year will not cause the CAMT entity to become subject to, or to violate, the reliance rules, including the consistency requirements, provided in section 3.02(1) of this notice for that taxable year. A CAMT entity that does not rely on the

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FVI exclusion option or hedge coordination option may continue to rely on proposed § 1.56A-24 until the first taxable year in which the forthcoming proposed regulations are published in the Federal Register .