§1258 Recharacterization of Gain From Certain Financial Transactions

Summary

Treats some profits that would normally be capital gains as ordinary income when they come from certain financial deals called conversion transactions. The ordinary-income amount equals the interest that would have built up on the taxpayer’s net money invested in the deal up to the sale date, calculated at 120 percent of a specified interest rate, minus any amount already taxed as ordinary income from earlier parts of the same deal. When a position with a preexisting loss becomes part of such a deal, that position is valued at fair market value when it joins the deal, but its built-in loss is recognized later when the position is actually sold. The rule does not apply to options dealers or commodities traders acting in their regular businesses, but it can still apply to limited partners or similar owners if almost all their expected return is the time value of their money and the interest was marketed as producing capital gains. Definitions (one line each): conversion transaction — a deal where nearly all expected return is from the time value of the investor’s money; applicable imputed income amount — the interest-based ordinary-income amount described above; applicable straddle — a straddle as defined in section 1092(c); applicable rate — the interest rate rules under section 1274(d) or, for indefinite terms, the Federal short-term rates under section 6621(b); built-in loss — the loss that would exist if the position were valued at fair market value when it joined the deal; options dealer — as defined in section 1256(g)(8); commodities trader — a member (or entitled trader) of a domestic board of trade designated as a contract market.