
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 106-554 Section 1(a)(7)]
[CITE: 26USC1231]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                 Subchapter P--Capital Gains and Losses
 
     PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
 
Sec. 1231. Property used in the trade or business and 
        involuntary conversions
        

(a) General rule

                       (1) Gains exceed losses

        If--
            (A) the section 1231 gains for any taxable year, exceed
            (B) the section 1231 losses for such taxable year,

    such gains and losses shall be treated as long-term capital gains or 
    long-term capital losses, as the case may be.

                   (2) Gains do not exceed losses

        If--
            (A) the section 1231 gains for any taxable year, do not 
        exceed
            (B) the section 1231 losses for such taxable year,

    such gains and losses shall not be treated as gains and losses from 
    sales or exchanges of capital assets.

                  (3) Section 1231 gains and losses

        For purposes of this subsection--

        (A) Section 1231 gain

            The term ``section 1231 gain'' means--
                (i) any recognized gain on the sale or exchange of 
            property used in the trade or business, and
                (ii) any recognized gain from the compulsory or 
            involuntary conversion (as a result of destruction in whole 
            or in part, theft or seizure, or an exercise of the power of 
            requisition or condemnation or the threat or imminence 
            thereof) into other property or money of--
                    (I) property used in the trade or business, or
                    (II) any capital asset which is held for more than 1 
                year and is held in connection with a trade or business 
                or a transaction entered into for profit.

        (B) Section 1231 loss

            The term ``section 1231 loss'' means any recognized loss 
        from a sale or exchange or conversion described in subparagraph 
        (A).

                          (4) Special rules

        For purposes of this subsection--
            (A) In determining under this subsection whether gains 
        exceed losses--
                (i) the section 1231 gains shall be included only if and 
            to the extent taken into account in computing gross income, 
            and
                (ii) the section 1231 losses shall be included only if 
            and to the extent taken into account in computing taxable 
            income, except that section 1211 shall not apply.

            (B) Losses (including losses not compensated for by 
        insurance or otherwise) on the destruction, in whole or in part, 
        theft or seizure, or requisition or condemnation of--
                (i) property used in the trade or business, or
                (ii) capital assets which are held for more than 1 year 
            and are held in connection with a trade or business or a 
            transaction entered into for profit,

        shall be treated as losses from a compulsory or involuntary 
        conversion.
            (C) In the case of any involuntary conversion (subject to 
        the provisions of this subsection but for this sentence) arising 
        from fire, storm, shipwreck, or other casualty, or from theft, 
        of any--
                (i) property used in the trade or business, or
                (ii) any capital asset which is held for more than 1 
            year and is held in connection with a trade or business or a 
            transaction entered into for profit,

        this subsection shall not apply to such conversion (whether 
        resulting in gain or loss) if during the taxable year the 
        recognized losses from such conversions exceed the recognized 
        gains from such conversions.

(b) Definition of property used in the trade or business

    For purposes of this section--

                          (1) General rule

        The term ``property used in the trade or business'' means 
    property used in the trade or business, of a character which is 
    subject to the allowance for depreciation provided in section 167, 
    held for more than 1 year, and real property used in the trade or 
    business, held for more than 1 year, which is not--
            (A) property of a kind which would properly be includible in 
        the inventory of the taxpayer if on hand at the close of the 
        taxable year,
            (B) property held by the taxpayer primarily for sale to 
        customers in the ordinary course of his trade or business,
            (C) a copyright, a literary, musical, or artistic 
        composition, a letter or memorandum, or similar property, held 
        by a taxpayer described in paragraph (3) of section 1221(a), or
            (D) 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 taxpayer described in paragraph (5) of 
        section 1221(a).

               (2) Timber, coal, or domestic iron ore

        Such term includes timber, coal, and iron ore with respect to 
    which section 631 applies.

                            (3) Livestock

        Such term includes--
            (A) cattle and horses, regardless of age, held by the 
        taxpayer for draft, breeding, dairy, or sporting purposes, and 
        held by him for 24 months or more from the date of acquisition, 
        and
            (B) other livestock, regardless of age, held by the taxpayer 
        for draft, breeding, dairy, or sporting purposes, and held by 
        him for 12 months or more from the date of acquisition.

    Such term does not include poultry.

                        (4) Unharvested crop

        In the case of an unharvested crop on land used in the trade or 
    business and held for more than 1 year, if the crop and the land are 
    sold or exchanged (or compulsorily or involuntarily converted) at 
    the same time and to the same person, the crop shall be considered 
    as ``property used in the trade or business.''

(c) Recapture of net ordinary losses

                           (1) In general

        The net section 1231 gain for any taxable year shall be treated 
    as ordinary income to the extent such gain does not exceed the non-
    recaptured net section 1231 losses.

             (2) Non-recaptured net section 1231 losses

        For purposes of this subsection, the term ``non-recaptured net 
    section 1231 losses'' means the excess of--
            (A) the aggregate amount of the net section 1231 losses for 
        the 5 most recent preceding taxable years beginning after 
        December 31, 1981, over
            (B) the portion of such losses taken into account under 
        paragraph (1) for such preceding taxable years.

                      (3) Net section 1231 gain

        For purposes of this subsection, the term ``net section 1231 
    gain'' means the excess of--
            (A) the section 1231 gains, over
            (B) the section 1231 losses.

                      (4) Net section 1231 loss

        For purposes of this subsection, the term ``net section 1231 
    loss'' means the excess of--
            (A) the section 1231 losses, over
            (B) the section 1231 gains.

                          (5) Special rules

        For purposes of determining the amount of the net section 1231 
    gain or loss for any taxable year, the rules of paragraph (4) of 
    subsection (a) shall apply.

(Aug. 16, 1954, ch. 736, 68A Stat. 325; Pub. L. 85-866, title I, 
Sec. 49(a), Sept. 2, 1958, 72 Stat. 1642; Pub. L. 88-272, title II, 
Sec. 227(a)(2), Feb. 26, 1964, 78 Stat. 97; Pub. L. 91-172, title II, 
Sec. 212(b)(1), title V, Secs. 514(b)(2), 516(b), Dec. 30, 1969, 83 
Stat. 571, 643, 646; Pub. L. 94-455, title XIV, Sec. 1402(b)(1)(R), (2), 
Oct. 4, 1976, 90 Stat. 1732; Pub. L. 95-600, title VII, Sec. 701(ee)(1), 
Nov. 6, 1978, 92 Stat. 2924; Pub. L. 97-34, title V, Sec. 505(c)(1), 
Aug. 13, 1981, 95 Stat. 332; Pub. L. 98-369, div. A, title I, 
Sec. 176(a), title VII, Sec. 711(c)(2)(A)(iii), title X, 
Sec. 1001(b)(15), (e), July 18, 1984, 98 Stat. 709, 944, 1012; Pub. L. 
106-170, title V, Sec. 532(c)(1)(G), Dec. 17, 1999, 113 Stat. 1930.)


                               Amendments

    1999--Subsec. (b)(1)(C), (D). Pub. L. 106-170 substituted ``section 
1221(a)'' for ``section 1221''.
    1984--Subsec. (a). Pub. L. 98-369, Sec. 1001(b)(15), (e), 
substituted ``6 months'' for ``1 year'' wherever appearing, applicable 
to property acquired after June 22, 1984, and before Jan. 1, 1988. See 
Effective Date of 1984 Amendment note below.
    Pub. L. 98-369, Sec. 711(c)(2)(A)(iii), amended subsec. (a) 
generally, substituting pars. (1) to (4), for ``If, during the taxable 
year, the recognized gains on sales or exchanges of property used in the 
trade or business, plus the recognized gains from the compulsory or 
involuntary conversion (as a result of destruction in whole or in part, 
theft or seizure, or an exercise of the power of requisition or 
condemnation or the threat or imminence thereof) of property used in the 
trade or business and capital assets held for more than 1 year into 
other property or money, exceed the recognized losses from such sales, 
exchanges, and conversions, such gains and losses shall be considered as 
gains and losses from sales or exchanges of capital assets held for more 
than 1 year. If such gains do not exceed such losses, such gains and 
losses shall not be considered as gains and losses from sales or 
exchanges of capital assets. For purposes of this subsection--
        ``(1) in determining under this subsection whether gains exceed 
    losses, the gains described therein shall be included only if and to 
    the extent taken into account in computing gross income and the 
    losses described therein shall be included only if and to the extent 
    taken into account in computing taxable income, except that section 
    1211 shall not apply; and
        ``(2) losses (including losses not compensated for by insurance 
    or otherwise) upon the destruction, in whole or in part, theft or 
    seizure, or requisition or condemnation of (A) property used in the 
    trade or business or (B) capital assets held for more than 1 year 
    shall be considered losses from a compulsory or involuntary 
    conversion.
In the case of any involuntary conversion (subject to the provisions of 
this subsection but for this sentence) arising from fire, storm, 
shipwreck, or other casualty, or from theft, of any property used in the 
trade or business or of any capital asset held for more than 1 year, 
this subsection shall not apply to such conversion (whether resulting in 
gain or loss) if during the taxable year the recognized losses from such 
conversions exceed the recognized gains from such conversions.''
    Subsec. (b)(1), (4). Pub. L. 98-369, Sec. 1001(b)(15), (e), 
substituted ``6 months'' for ``1 year'', applicable to property acquired 
after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 
Amendment note below.
    Subsec. (c). Pub. L. 98-369, Sec. 176(a), added subsec. (c).
    1981--Subsec. (b)(1)(D). Pub. L. 97-34 substituted ``paragraph (5)'' 
for ``paragraph (6)''.
    1978--Subsec. (b)(1)(D). Pub. L. 95-600 added subpar. (D).
    1976--Subsecs. (a), (b)(1), (4). Pub. L. 94-455, Sec. 1402(b)(2), 
provided that ``9 months'' would be changed to ``1 year'' wherever 
appearing.
    Pub. L. 94-455, Sec. 1402(b)(1)(R), provided that in subsecs. (a), 
first and last sentences, (a)(2), and (b)(1), (4), ``6 months'' would be 
changed to ``9 months'' for taxable years beginning in 1977.
    1969--Subsec. (a). Pub. L. 91-172, Sec. 516(b), provided that 
casualty (or theft) losses with respect to depreciable property and real 
estate used in trade or business and capital assets held for the 
production of income as well as personal assets are to be consolidated 
with casualty (or theft) gains with respect to this type of property and 
if the casualty losses exceed the casualty gains, the net loss is 
treated as an ordinary loss without regard to whether there may be 
noncasualty gains under this section, but, if the casualty gains exceed 
the casualty losses, the net gain is treated as a gain under this 
section and must be consolidated with other gains and losses under this 
section.
    Subsec. (b)(1)(C). Pub. L. 91-172, Sec. 514(b)(2), inserted 
reference to a letter or memorandum.
    Subsec. (b)(3). Pub. L. 91-172, Sec. 212(b)(1), redesignated 
existing provisions as subpar. (B) and added subpar. (A).
    1964--Subsec. (b)(2). Pub. L. 88-272 inserted reference to iron ore 
in text, and to domestic iron ore in heading.
    1958--Subsec. (a). Pub. L. 85-866 inserted provision respecting 
casualty losses sustained upon certain uninsured property.


                    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 1984 Amendment

    Section 176(b) of Pub. L. 98-369 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to net section 
1231 gains for taxable years beginning after December 31, 1984.''
    Amendment by section 711(c)(2)(A)(iii) of Pub. L. 98-369 applicable 
to taxable years beginning after Dec. 31, 1983, see section 
711(c)(2)(A)(v) of Pub. L. 98-369, set out as a note under section 165 
of this title.
    Amendment by section 1001(b)(15) of Pub. L. 98-369 applicable to 
property acquired after June 22, 1984, and before Jan. 1, 1988, see 
section 1001(e) of Pub. L. 98-369, set out as a note under section 166 
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 1978 Amendment

    Section 701(ee)(2) of Pub. L. 95-600 provided that: ``The amendment 
made by paragraph (1) [amending this section] shall apply with respect 
to sales, exchanges, and contributions made after October 4, 1976.''


                    Effective Date of 1976 Amendment

    Section 1402(b)(1) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning in 1977.
    Section 1402(b)(2) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning after Dec. 31, 1977.


                    Effective Date of 1969 Amendment

    Section 212(b)(2) of Pub. L. 91-172 provided that: ``The amendments 
made by paragraph (1) [amending this section] shall apply to livestock 
acquired after December 31, 1969.''
    Amendment by section 514(b)(2) of Pub. L. 91-172 applicable to sales 
and other dispositions occurring after July 25, 1969, see section 514(c) 
of Pub. L. 91-172, set out as a note under section 1221 of this title.
    Amendment by section 516(b) of Pub. L. 91-172 applicable to taxable 
years beginning after Dec. 31, 1969, see section 516(d)(2) of Pub. L. 
91-172, set out as a note under section 1001 of this title.


                    Effective Date of 1964 Amendment

    Amendment by Pub. L. 88-272 applicable with respect to amounts 
received or accrued in taxable years beginning after Dec. 31, 1963, 
attributable to iron ore mined in such years, see section 227(c) of Pub. 
L. 88-272, set out as a note under section 272 of this title.


                    Effective Date of 1958 Amendment

    Section 49(b) of Pub. L. 85-866 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to taxable years 
beginning after December 31, 1957.''

                  Section Referred to in Other Sections

    This section is referred to in sections 1, 64, 118, 170, 268, 272, 
341, 451, 543, 702, 724, 735, 751, 755, 818, 904, 1223, 1400B, 1400F, 
1503, 7704 of this title.
