Blocked income refers to money earned by a foreign tax payer. It is not subject to the U.S. taxation because the foreign country prohibits changing the income into dollars. Blocked income is recognized by a cash basis taxpayer as gross income in the year of receipt. If such blocked income is available as disposable income within the foreign country, it can be valued at a free market exchange rate in the U.S.
The following is a case law defining blocked income :
Income subject to foreign exchange regulations is termed as blocked income. [BERMAN v. COMMISSIONER, T.C. Memo 1983-214 (T.C. 1983)].