§1258 Recharacterization of Gain From Certain Financial Transactions

Summary

Treats gains that would normally be capital gains as ordinary income when they come from certain deals called conversion transactions, but only up to a calculated amount. The calculated amount is the interest that would have built up on your net money in the deal through the sale date at a rate equal to 120 percent of the “applicable rate,” minus any amount already taxed as ordinary income from earlier parts of the same deal. The Secretary must write rules to lower that calculated amount when appropriate (for example, for amounts capitalized under section 263(g) or ordinary income already received). Applicable imputed income amount: the interest-based number just described (120 percent of the applicable rate, less earlier ordinary income). Conversion transaction: a deal where most expected return comes from the time value of your net investment, such as buying and then contemporaneously agreeing to sell the same property, an applicable straddle, transactions marketed as producing capital gains from time-value returns, or other types listed by the Secretary. Applicable straddle: a straddle as defined in section 1092(c). Applicable rate: either the Federal rate from section 1274(d) compounded semiannually (if treated like debt) or, for an indefinite term, the Federal short-term rates from section 6621(b) compounded daily. Built-in loss: the loss that would exist if a position were sold for its fair market value when it became part of the transaction; such positions are taken at that fair market value for later periods, and the built-in loss is recognized on later sale with its usual character. Exceptions: the rule does not apply to options dealers or commodities traders acting in their normal businesses (definitions referenced by other sections), and a dealer/trader exception also can be ignored for limited partners or limited entrepreneurs when their return is mainly time value, the interest was marketed as producing capital gains, or the Secretary says so by rule.