
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document affected by Public Law 107-16 Section 542(e)(2)(A)]
[CITE: 26USC1221]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                 Subchapter P--Capital Gains and Losses
 
    PART III--GENERAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
 
Sec. 1221. Capital asset defined


(a) In general

    For purposes of this subtitle, the term ``capital asset'' means 
property held by the taxpayer (whether or not connected with his trade 
or business), but does not include--
        (1) stock in trade of the taxpayer or other property of a kind 
    which would properly be included in the inventory of the taxpayer if 
    on hand at the close of the taxable year, or property held by the 
    taxpayer primarily for sale to customers in the ordinary course of 
    his trade or business;
        (2) property, used in his trade or business, of a character 
    which is subject to the allowance for depreciation provided in 
    section 167, or real property used in his trade or business;
        (3) a copyright, a literary, musical, or artistic composition, a 
    letter or memorandum, or similar property, held by--
            (A) a taxpayer whose personal efforts created such property,
            (B) in the case of a letter, memorandum, or similar 
        property, a taxpayer for whom such property was prepared or 
        produced, or
            (C) a taxpayer in whose hands the basis of such property is 
        determined, for purposes of determining gain from a sale or 
        exchange, in whole or part by reference to the basis of such 
        property in the hands of a taxpayer described in subparagraph 
        (A) or (B);

        (4) accounts or notes receivable acquired in the ordinary course 
    of trade or business for services rendered or from the sale of 
    property described in paragraph (1);
        (5) a publication of the United States Government (including the 
    Congressional Record) which is received from the United States 
    Government or any agency thereof, other than by purchase at the 
    price at which it is offered for sale to the public, and which is 
    held by--
            (A) a taxpayer who so received such publication, or
            (B) a taxpayer in whose hands the basis of such publication 
        is determined, for purposes of determining gain from a sale or 
        exchange, in whole or in part by reference to the basis of such 
        publication in the hands of a taxpayer described in subparagraph 
        (A);

        (6) any commodities derivative financial instrument held by a 
    commodities derivatives dealer, unless--
            (A) it is established to the satisfaction of the Secretary 
        that such instrument has no connection to the activities of such 
        dealer as a dealer, and
            (B) such instrument is clearly identified in such dealer's 
        records as being described in subparagraph (A) before the close 
        of the day on which it was acquired, originated, or entered into 
        (or such other time as the Secretary may by regulations 
        prescribe);

        (7) any hedging transaction which is clearly identified as such 
    before the close of the day on which it was acquired, originated, or 
    entered into (or such other time as the Secretary may by regulations 
    prescribe); or
        (8) supplies of a type regularly used or consumed by the 
    taxpayer in the ordinary course of a trade or business of the 
    taxpayer.

(b) Definitions and special rules

          (1) Commodities derivative financial instruments

        For purposes of subsection (a)(6)--

        (A) Commodities derivatives dealer

            The term ``commodities derivatives dealer'' means a person 
        which \1\ regularly offers to enter into, assume, offset, 
        assign, or terminate positions in commodities derivative 
        financial instruments with customers in the ordinary course of a 
        trade or business.
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    \1\ So in original. Probably should be ``who''.
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        (B) Commodities derivative financial instrument

            (i) In general

                The term ``commodities derivative financial instrument'' 
            means any contract or financial instrument with respect to 
            commodities ( \2\ other than a share of stock in a 
            corporation, a beneficial interest in a partnership or 
            trust, a note, bond, debenture, or other evidence of 
            indebtedness, or a section 1256 contract (as defined in 
            section 1256(b)), the value or settlement price of which is 
            calculated by or determined by reference to a specified 
            index.
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    \2\ So in original. No closing parenthesis was enacted.
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            (ii) Specified index

                The term ``specified index'' means any one or more or 
            any combination of--
                    (I) a fixed rate, price, or amount, or
                    (II) a variable rate, price, or amount,

          which is based on any current, objectively determinable 
            financial or economic information with respect to 
            commodities which is not within the control of any of the 
            parties to the contract or instrument and is not unique to 
            any of the parties' circumstances.

                       (2) Hedging transaction

        (A) In general

            For purposes of this section, the term ``hedging 
        transaction'' means any transaction entered into by the taxpayer 
        in the normal course of the taxpayer's trade or business 
        primarily--
                (i) to manage risk of price changes or currency 
            fluctuations with respect to ordinary property which is held 
            or to be held by the taxpayer,
                (ii) to manage risk of interest rate or price changes or 
            currency fluctuations with respect to borrowings made or to 
            be made, or ordinary obligations incurred or to be incurred, 
            by the taxpayer, or
                (iii) to manage such other risks as the Secretary may 
            prescribe in regulations.

        (B) Treatment of nonidentification or improper identification of 
                hedging transactions

            Notwithstanding subsection (a)(7), the Secretary shall 
        prescribe regulations to properly characterize any income, gain, 
        expense, or loss arising from a transaction--
                (i) which is a hedging transaction but which was not 
            identified as such in accordance with subsection (a)(7), or
                (ii) which was so identified but is not a hedging 
            transaction.

                           (3) Regulations

        The Secretary shall prescribe such regulations as are 
    appropriate to carry out the purposes of paragraph (6) and (7) of 
    subsection (a) in the case of transactions involving related 
    parties.

(Aug. 16, 1954, ch. 736, 68A Stat. 321; Pub. L. 91-172, title V, 
Sec. 514(a), Dec. 30, 1969, 83 Stat. 643; Pub. L. 94-455, title XIX, 
Sec. 1901(c)(9), title XXI, Sec. 2132(a), Oct. 4, 1976, 90 Stat. 1803, 
1925; Pub. L. 97-34, title V, Sec. 505(a), Aug. 13, 1981, 95 Stat. 331; 
Pub. L. 106-170, title V, Sec. 532(a), Dec. 17, 1999, 113 Stat. 1928.)


                               Amendments

    1999--Pub. L. 106-170 designated existing provisions as subsec. (a), 
inserted heading, and added pars. (6) to (8) and subsec. (b).
    1981--Pars. (5), (6). Pub. L. 97-34 redesignated par. (6) as (5) and 
struck out former par. (5), which excluded from definition of ``capital 
asset'' an obligation of the United States or any of its possessions, or 
of a State or any political subdivision thereof, or of the District of 
Columbia, issued on or after March 1, 1941, on a discount basis and 
payable without interest at a fixed maturity date not exceeding one year 
from the date of issue, and is covered by section 1232(a)(4)(B) of this 
title.
    1976--Par. (5). Pub. L. 94-455, Sec. 1901(c)(9), struck out ``or 
Territory,'' after ``State''.
    Par. (6). Pub. L. 94-455, Sec. 2132(a), added par. (6).
    1969--Par. (3). Pub. L. 91-172 inserted reference to a letter or 
memorandum, added subpar. (B) dealing with a letter or memorandum, and 
redesignated former subpar. (B) as (C).


                    Effective Date of 1999 Amendment

    Amendment by Pub. L. 106-170 applicable to any instrument held, 
acquired, or entered into, any transaction entered into, and supplies 
held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. 
L. 106-170, set out as a note under section 170 of this title.


                    Effective Date of 1981 Amendment

    Amendment by Pub. L. 97-34 applicable to property acquired and 
positions established by the taxpayer after June 23, 1981, in taxable 
years ending after such date, and applicable when so elected with 
respect to property held on June 23, 1981, see section 508 of Pub. L. 
97-34, set out as an Effective Date note under section 1092 of this 
title.


                    Effective Date of 1976 Amendment

    Section 2132(b) of Pub. L. 94-455 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to sales, 
exchanges, and contributions made after the date of enactment of this 
Act [Oct. 4, 1976].''


                    Effective Date of 1969 Amendment

    Section 514(c) of Pub. L. 91-172 provided that: ``The amendments 
made by this section [amending this section and sections 341 and 1231 of 
this title] shall apply to sales and other dispositions occurring after 
July 25, 1969.''

                  Section Referred to in Other Sections

    This section is referred to in sections 170, 198, 263A, 267, 341, 
367, 543, 707, 751, 775, 818, 856, 857, 864, 865, 954, 995, 1092, 1223, 
1231, 1234, 1234B, 1248, 1256, 1362, 1397C, 4662, 7704 of this title.
