§1259 Constructive sales treatment for appreciated financial positions

Summary

A taxpayer who makes a constructive sale of an appreciated financial position must treat it like a real sale at the fair market value on the date of that constructive sale and report any gain in the tax year that includes that date. Later gains or losses on that position must be adjusted to account for the gain already reported, and the holding period for the position is treated as if it began on the constructive-sale date. An "appreciated financial position" is any stock, debt, or partnership interest that would show a gain if sold, except certain fixed, nonconvertible debt, hedges of that debt, or positions already marked to market. A "position" means an interest such as a futures or forward contract, a short sale, or an option. A constructive sale happens when the taxpayer (or a related person) enters into things like a short sale of the same or substantially identical property, an offsetting notional principal contract, a futures or forward contract to deliver the same property, or, in some cases, other transactions that have the same effect. A contract to buy a non-marketable security that settles within one year is not a constructive sale. A transaction can be ignored for the year if it is closed on or before the 30th day after year‑end, the taxpayer holds the position for the 60‑day period after the transaction closes, and the taxpayer’s risk of loss is not reduced in the particular way described by the tax rules. A related person means relationships listed in other tax rules (sections 267(b) or 707(b)) or transactions done to avoid these rules. Trust interests that are actively traded are treated like stock unless the trust mostly holds that special debt. If a taxpayer has many positions, the rule matches them the same way actual sales are matched. The Treasury Secretary must write rules needed to carry this out.