§1259 — Title 26 Internal Revenue Code | U.S. Code

Summary

If you own stock, a debt instrument, or a partnership interest that has gone up in value, you normally don't pay tax on the gain until you sell. But if you lock in that gain another way — by short-selling the same or nearly identical property, entering an offsetting notional principal contract on it, or signing a futures or forward contract to deliver it — the law treats that as a "constructive sale." You must report the gain as if you had sold the investment at its market value on that date, and your holding period starts over. The rule also works in reverse: if your appreciated position is itself a short sale or one of those contracts, buying the same property triggers it. There are exceptions. Straight debt that pays a fixed principal and can't be converted into the issuer's stock doesn't count, and neither do positions already marked to market under the tax law. A contract to sell stock, debt, or a partnership interest that is not a marketable security isn't a constructive sale if it settles within 1 year. And a transaction is disregarded if it is closed by the 30th day after the end of the tax year and you then hold the appreciated position, without reducing your risk of loss, for the 60 days after closing.

Title 26, §1259

Internal Revenue Code — Source: USLM XML via OLRC

(a)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)For purposes of this section—

(1)Except as provided in paragraph (2), the term “appreciated financial position” means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were such position sold, assigned, or otherwise terminated at its fair market value.

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

(c)For purposes of this section—

(1)A taxpayer shall be treated as having made a constructive sale of an appreciated financial position if the taxpayer (or a related person)—

(A)enters into a short sale of the same or substantially identical property,

(B)enters into an offsetting notional principal contract with respect to the same or substantially identical property,

(C)enters into a futures or forward contract to deliver the same or substantially identical property,

(D)in the case of an appreciated financial position that is a short sale or a contract described in subparagraph (B) or (C) with respect to any property, acquires the same or substantially identical property, or

(E)to the extent prescribed by the Secretary in regulations, enters into 1 or more other transactions (or acquires 1 or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.

(2)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)(A)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)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),

(4)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)For purposes of this section—

(1)The term “forward contract” means a contract to deliver a substantially fixed amount of property (including cash) for a substantially fixed price.

(2)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)(1)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,

(2)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)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)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

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