Constructive sales treatment for appreciated financial positions

26 U.S.C. § 1259

• Title: 26 — Internal Revenue Code
• Chapter: Subchapter P—Capital Gains and Losses
• Part: IV

Text

(a) In general
If there is a constructive sale of an appreciated financial position—
(1) the taxpayer shall recognize gain as if such position were sold, assigned, or otherwise terminated at its fair market value on the date of such constructive sale (and any gain shall be taken into account for the taxable year which includes such date), and
(2) for purposes of applying this title for periods after the constructive sale—
(A) proper adjustment shall be made in the amount of any gain or loss subsequently realized with respect to such position for any gain taken into account by reason of paragraph (1), and
(B) the holding period of such position shall be determined as if such position were originally acquired on the date of such constructive sale.
(b) Appreciated financial position
For purposes of this section—
Except as provided in paragraph (2), the term "appreciated financial position" means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were such position sold, assigned, or otherwise terminated at its fair market value.
The term "appreciated financial position" shall not include—
(A) any position with respect to debt if—
(i) the position unconditionally entitles the holder to receive a specified principal amount,
(ii) the interest payments (or other similar amounts) with respect to such position meet the requirements of clause (i) of section 860G(a)(1)(B), and
(iii) such position is not convertible (directly or indirectly) into stock of the issuer or any related person,
(B) any hedge with respect to a position described in subparagraph (A), and
(C) any position which is marked to market under any provision of this title or the regulations thereunder.
The term "position" means an interest, including a futures or forward contract, short sale, or option.
(c) Constructive sale
For purposes of this section—
A taxpayer shall be treated as having made a constructive sale of an appreciated financial position if the taxpayer (or a related person)—
(A) enters into a short sale of the same or substantially identical property,
(B) enters into an offsetting notional principal contract with respect to the same or substantially identical property,
(C) enters into a futures or forward contract to deliver the same or substantially identical property,
(D) in the case of an appreciated financial position that is a short sale or a contract described in subparagraph (B) or (C) with respect to any property, acquires the same or substantially identical property, or
(E) to the extent prescribed by the Secretary in regulations, enters into 1 or more other transactions (or acquires 1 or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.
A taxpayer shall not be treated as having made a constructive sale solely because the taxpayer enters into a contract for sale of any stock, debt instrument, or partnership interest which is not a marketable security (as defined in section 453(f)) if the contract settles within 1 year after the date such contract is entered into.
In applying this section, there shall be disregarded any transaction (which would otherwise cause a constructive sale) during the taxable year if—
(i) such transaction is closed on or before the 30th day after the close of such taxable year,
(ii) the taxpayer holds the appreciated financial position throughout the 60-day period beginning on the date such transaction is closed, and
(iii) at no time during such 60-day period is the taxpayer's risk of loss with respect to such position reduced by reason of a circumstance which would be described in section 246(c)(4) if references to stock included references to such position.
If—
(i) a transaction, which would otherwise cause a constructive sale of an appreciated financial position, is closed during the taxable year or during the 30 days thereafter, and
(ii) another transaction is entered into during the 60-day period beginning on the date the transaction referred to in clause (i) is closed—
(I) which would (but for this subparagraph) cause the requirement of subparagraph (A)(iii) not to be met with respect to the transaction described in clause (i) of this subparagraph,
(II) which is closed on or before the 30th day after the close of the taxable year in which the transaction referred to in clause (i) occurs, and
(III) which meets the requirements of clauses (ii) and (iii) of subparagraph (A),
the transaction referred to in clause (ii) shall be disregarded for purposes of determining whether the requirements of subparagraph (A)(iii) are met with respect to the transaction described in clause (i).
A person is related to another person with respect to a transaction if—
(A) the relationship is described in section 267(b) or 707(b), and
(B) such transaction is entered into with a view toward avoiding the purposes of this section.
(d) Other definitions
For purposes of this section—
The term "forward contract" means a contract to deliver a substantially fixed amount of property (including cash) for a substantially fixed price.
The term "offsetting notional principal contract" means, with respect to any property, an agreement which includes—
(A) a requirement to pay (or provide credit for) all or substantially all of the investment yield (including appreciation) on such property for a specified period, and
(B) a right to be reimbursed for (or receive credit for) all or substantially all of any decline in the value of such property.
(e) Special rules
If—
(A) there is a constructive sale of any appreciated financial position,
(B) such position is subsequently disposed of, and
(C) at the time of such disposition, the transaction resulting in the constructive sale of such position is open with respect to the taxpayer or any related person,
solely for purposes of determining whether the taxpayer has entered into a constructive sale of any other appreciated financial position held by the taxpayer, the taxpayer shall be treated as entering into such transaction immediately after such disposition. For purposes of the preceding sentence, an assignment or other termination shall be treated as a disposition.
For purposes of this section, an interest in a trust which is actively traded (within the meaning of section 1092(d)(1)) shall be treated as stock unless substantially all (by value) of the property held by the trust is debt described in subsection (b)(2)(A).
If a taxpayer holds multiple positions in property, the determination of whether a specific transaction is a constructive sale and, if so, which appreciated financial position is deemed sold shall be made in the same manner as actual sales.
(f) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

History

(Added Pub. L. 105–34, title X, §1001(a), Aug. 5, 1997, 111 Stat. 903; amended Pub. L. 105–206, title VI, §6010(a)(1), (2), July 22, 1998, 112 Stat. 812, 813; Pub. L. 108–311, title IV, §406(e), Oct. 4, 2004, 118 Stat. 1189.)

Editorial Notes

Editorial Notes

Amendments
2004—Subsec. (c)(2). Pub. L. 108–311, §406(e)(1), substituted "A taxpayer shall not be treated as having made a constructive sale solely because the taxpayer enters into a contract" for "The term 'constructive sale' shall not include any contract".
Subsec. (c)(3)(A). Pub. L. 108–311, §406(e)(2), substituted "cause a constructive sale" for "be treated as a constructive sale" in introductory provisions.
Subsec. (c)(3)(A)(i). Pub. L. 108–311, §406(e)(3), substituted "on or before" for "before the end of".
Subsec. (c)(3)(B). Pub. L. 108–311, §406(e)(7), substituted "certain closed transactions where risk of loss on appreciated financial position diminished" for "positions which are reestablished" in heading.
Subsec. (c)(3)(B)(i). Pub. L. 108–311, §406(e)(2), substituted "cause a constructive sale" for "be treated as a constructive sale".
Subsec. (c)(3)(B)(ii). Pub. L. 108–311, §406(e)(4), struck out "substantially similar" after "another" in introductory provisions.
Subsec. (c)(3)(B)(ii)(I). Pub. L. 108–311, §406(e)(5), amended subcl. (I) generally. Prior to amendment, subcl. (I) read as follows: "which also would otherwise be treated as a constructive sale of such position,".
Subsec. (c)(3)(B)(ii)(II). Pub. L. 108–311, §406(e)(6), inserted "on or" before "before the 30th day".
1998—Subsec. (b)(2)(A)(i) to (iii). Pub. L. 105–206, §6010(a)(1)(A), substituted "position" for "debt".
Subsec. (b)(2)(B), (C). Pub. L. 105–206, §6010(a)(1)(B), (C), added subpar. (B) and redesignated former subpar. (B) as (C).
Subsec. (d)(1). Pub. L. 105–206, §6010(a)(2), inserted "(including cash)" after "property".

Statutory Notes and Related Subsidiaries

Effective Date of 2004 Amendment
Amendment by Pub. L. 108–311 effective as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 406(h) of Pub. L. 108–311, set out as a note under section 55 of this title.

Effective Date of 1998 Amendment
Amendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title.

Effective Date
Section applicable to any constructive sale after June 8, 1997, with certain exceptions, see section 1001(d) of Pub. L. 105–34, set out as an Effective Date of 1997 Amendment note under section 475 of this title.