PRIA, Government Policy, Made Personal

Summary

Tells you when the tax rules treat certain deals as if you sold an investment that has gone up in value. If you enter into one of these “constructive sale” transactions, you must report and pay tax on the gain as if you actually sold the position at its fair market value on that date, and that gain counts in the tax year that includes that date. Later gains or losses on that position are adjusted for the amount already taxed, and the position’s holding period starts on the constructive sale date. An "appreciated financial position" means a stock, debt, or partnership interest that would show a gain if sold at market value. It does not include some plain debt that pays a fixed principal and qualified interest and is not convertible, 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. You are treated as making a constructive sale when you (or a related person as described in section 267(b) or 707(b) and done to avoid this rule) enter into a short sale, an offsetting notional principal contract, a futures/forward to deliver the same or substantially identical property, acquire the same property when you had a short or similar contract, or other transactions the Treasury says have the same effect. Contracts to sell nonmarketable property that settle within 1 year are not treated as constructive sales. There are also special short-window rules about transactions closed near year end (30 days) and holding the position for 60 days after closing, plus other technical rules about trusts, multiple positions, and how later sales interact. The Treasury may write rules to implement these points.

Title 26, §1259

Internal Revenue Code, Source: USLM XML via OLRC

(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

(1) In general

(2)Exceptions

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.

(3)Position

The term “position” means an interest, including a futures or forward contract, short sale, or option.

(c)Constructive sale

For purposes of this section

(1) In general

(2)Exception for sales of nonpublicly traded property

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.

(3)Exception for certain closed transactions

(A)In general

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.

(B)Treatment of certain closed transactions where risk of loss on appreciated financial position diminished

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).

(4)Related person

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

(1) Forward contract

(2)Offsetting notional principal contract

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

(1)Treatment of subsequent sale of position which was deemed sold

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.

(2)Certain trust instruments treated as stock

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).

(3)Multiple positions in property

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.

Notes & Related Subsidiaries

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 AmendmentAmendment 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 AmendmentAmendment 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.

§1259 Constructive Sales Treatment for Appreciated Financial Positions

Summary

Title 26, §1259

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Effective Date

Effective Date

Citations & Metadata