§1221 — Title 26 Internal Revenue Code | U.S. Code

Summary

Says what counts as a "capital asset" for this part of the tax code and lists what is not a capital asset. A capital asset is simply property a taxpayer owns, whether or not it’s used in a business. But eight types of property are not capital assets: inventory or items held for sale to customers; business property you depreciate or business real estate; certain patents, inventions, designs, secret formulas, copyrights and similar items when the taxpayer created them or when the tax basis traces to the creator; accounts or notes receivable from sales or services; U.S. government publications received free; commodities-derivative contracts held by dealers unless shown to be unrelated and clearly identified in records when acquired; hedging transactions that are clearly identified when entered; and supplies regularly used or consumed in the business. The law also defines related terms and rules. A commodities derivatives dealer is someone who regularly deals in those contracts. A commodities derivative financial instrument is a contract tied to commodity values by a specified index (not stocks, bonds, or certain section 1256 contracts). A hedging transaction is one entered in the normal course of business mainly to manage risks like price, interest rate, or currency changes. The Secretary must make rules about how to treat misidentified or related-party transactions. A taxpayer described in the patent/copyright rule may elect that paragraphs (1) and (3) do not apply to musical compositions or copyrights in musical works they sell or exchange.

Title 26, §1221

Internal Revenue Code — Source: USLM XML via OLRC

(a)For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—

(1)stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

(2)property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;

(3)a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—

(A)a taxpayer whose personal efforts created such property,

(B)in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

(C)a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

(4)accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);

(5)a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—

(A)a taxpayer who so received such publication, or

(B)a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);

(6)any commodities derivative financial instrument held by a commodities derivatives dealer, unless—

(A)it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and

(B)such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);

(7)any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or

(8)supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

(b)(1)For purposes of subsection (a)(6)—

(A)The term “commodities derivatives dealer” means a person which 11 So in original. Probably should be “who”. regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.

(B)(i)The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.

(ii)The term “specified index” means any one or more or any combination of—

(I)a fixed rate, price, or amount, or

(II)a variable rate, price, or amount,

(2)(A)For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—

(i)to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,

(ii)to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or

(iii)to manage such other risks as the Secretary may prescribe in regulations.

(B)Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—

(i)which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or

(ii)which was so identified but is not a hedging transaction.

(3)At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).

(4)The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2017—Subsec. (a)(3). Pub. L. 115–97 inserted “a patent, invention, model or design (whether or not patented), a secret formula or process,” before “a copyright” in introductory provisions. 2010—Subsec. (a)(3)(C). Pub. L. 111–312 amended subsec. (a)(3)(C) to read as if amendment by Pub. L. 107–16, § 542(e)(2)(A), had never been enacted. See 2001 Amendment note below. 2006—Subsec. (b)(3). Pub. L. 109–432 struck out “before

January 1, 2011,” after “exchanged”. Pub. L. 109–222 added par. (3). Former par. (3) redesignated (4). Subsec. (b)(4). Pub. L. 109–222 redesignated par. (3) as (4). 2002—Subsec. (b)(1)(B)(i). Pub. L. 107–147 substituted “1256(b)))” for “1256(b))”. 2001—Subsec. (a)(3)(C). Pub. L. 107–16, § 542(e)(2)(A), inserted “(other than by reason of section 1022)” after “is determined”. 1999—Pub. L. 106–170 designated existing provisions as subsec. (a), inserted heading, and added pars. (6) to (8) and subsec. (b). 1981—Pars. (5), (6). Pub. L. 97–34 redesignated par. (6) as (5) and struck out former par. (5), which excluded from definition of “capital asset” an obligation of the United States or any of its possessions, or of a State or any political subdivision thereof, or of the District of Columbia, issued on or after

March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, and is covered by section 1232(a)(4)(B) of this title. 1976—Par. (5). Pub. L. 94–455, § 1901(c)(9), struck out “or Territory,” after “State”. Par. (6). Pub. L. 94–455, § 2132(a), added par. (6). 1969—Par. (3). Pub. L. 91–172 inserted reference to a letter or memorandum, added subpar. (B) dealing with a letter or memorandum, and redesignated former subpar. (B) as (C).

Statutory Notes and Related Subsidiaries

Effective Date

of 2017 Amendment Pub. L. 115–97, title I, § 13314(c), Dec. 22, 2017, 131 Stat. 2133, provided that: “The

Amendments

made by this section [amending this section and section 1231 of this title] shall apply to dispositions after December 31, 2017.”

Effective Date

of 2010 AmendmentAmendment by Pub. L. 111–312 applicable to estates of decedents dying, and transfers made after Dec. 31, 2009, except as otherwise provided, see section 301(e) of Pub. L. 111–312, set out as an Effective and Termination Dates of 2010 Amendment note under section 121 of this title.

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of 2006 Amendment Pub. L. 109–432, div. A, title IV, § 412(b), Dec. 20, 2006, 120 Stat. 2963, provided that: “The amendment made by this section [amending this section] shall take effect as if included in section 204 of the Tax Increase Prevention and Reconciliation Act of 2005 [Pub. L. 109–222].” Amendment by Pub. L. 109–222 applicable to sales and exchanges in taxable years beginning after May 17, 2006, see section 204(c) of Pub. L. 109–222, set out as a note under section 170 of this title.

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of 2001 AmendmentAmendment by Pub. L. 107–16 applicable to estates of decedents dying after Dec. 31, 2009, see section 542(f)(1) of Pub. L. 107–16, set out as a note under section 121 of this title.

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of 1999 AmendmentAmendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.

Effective Date

of 1981 AmendmentAmendment by Pub. L. 97–34 applicable to property acquired and positions established by the taxpayer after

June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on

June 23, 1981, see section 508 of Pub. L. 97–34, set out as an

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note under section 1092 of this title.

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of 1976 Amendment Pub. L. 94–455, title XXI, § 2132(b), Oct. 4, 1976, 90 Stat. 1925, provided that: “The amendment made by subsection (a) [amending this section] shall apply to sales, exchanges, and contributions made after the date of enactment of this Act [Oct. 4, 1976].”

Effective Date

of 1969 Amendment Pub. L. 91–172, title V, § 514(c), Dec. 30, 1969, 83 Stat. 643, provided that: “The

Amendments

made by this section [amending this section and section 341 and 1231 of this title] shall apply to sales and other dispositions occurring after July 25, 1969.”

§1221 Capital asset defined

Summary

Title 26, §1221

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