
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)[401(f)]]
[CITE: 26USC1233]

 
                     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. 1233. Gains and losses from short sales


(a) Capital assets

    For purposes of this subtitle, gain or loss from the short sale of 
property shall be considered as gain or loss from the sale or exchange 
of a capital asset to the extent that the property, including a 
commodity future, used to close the short sale constitutes a capital 
asset in the hands of the taxpayer.

(b) Short-term gains and holding periods

    If gain or loss from a short sale is considered as gain or loss from 
the sale or exchange of a capital asset under subsection (a) and if on 
the date of such short sale substantially identical property has been 
held by the taxpayer for not more than 1 year (determined without regard 
to the effect, under paragraph (2) of this subsection, of such short 
sale on the holding period), or if substantially identical property is 
acquired by the taxpayer after such short sale and on or before the date 
of the closing thereof--
        (1) any gain on the closing of such short sale shall be 
    considered as a gain on the sale or exchange of a capital asset held 
    for not more than 1 year (notwithstanding the period of time any 
    property used to close such short sale has been held); and
        (2) the holding period of such substantially identical property 
    shall be considered to begin (notwithstanding section 1223, relating 
    to the holding period of property) on the date of the closing of the 
    short sale, or on the date of a sale, gift, or other disposition of 
    such property, whichever date occurs first. This paragraph shall 
    apply to such substantially identical property in the order of the 
    dates of the acquisition of such property, but only to so much of 
    such property as does not exceed the quantity sold short.

For purposes of this subsection, the acquisition of an option to sell 
property at a fixed price shall be considered as a short sale, and the 
exercise or failure to exercise such option shall be considered as a 
closing of such short sale.

(c) Certain options to sell

    Subsection (b) shall not include an option to sell property at a 
fixed price acquired on the same day on which the property identified as 
intended to be used in exercising such option is acquired and which, if 
exercised, is exercised through the sale of the property so identified. 
If the option is not exercised, the cost of the option shall be added to 
the basis of the property with which the option is identified. This 
subsection shall apply only to options acquired after August 16, 1954.

(d) Long-term losses

    If on the date of such short sale substantially identical property 
has been held by the taxpayer for more than 1 year, any loss on the 
closing of such short sale shall be considered as a loss on the sale or 
exchange of a capital asset held for more than 1 year (notwithstanding 
the period of time any property used to close such short sale has been 
held, and notwithstanding section 1234).

(e) Rules for application of section

    (1) Subsection (b)(1) or (d) shall not apply to the gain or loss, 
respectively, on any quantity of property used to close such short sale 
which is in excess of the quantity of the substantially identical 
property referred to in the applicable subsection.
    (2) For purposes of subsections (b) and (d)--
        (A) the term ``property'' includes only stocks and securities 
    (including stocks and securities dealt with on a ``when issued'' 
    basis), and commodity futures, which are capital assets in the hands 
    of the taxpayer, but does not include any position to which section 
    1092(b) applies;
        (B) in the case of futures transactions in any commodity on or 
    subject to the rules of a board of trade or commodity exchange, a 
    commodity future requiring delivery in 1 calendar month shall not be 
    considered as property substantially identical to another commodity 
    future requiring delivery in a different calendar month;
        (C) in the case of a short sale of property by an individual, 
    the term ``taxpayer'', in the application of this subsection and 
    subsections (b) and (d), shall be read as ``taxpayer or his 
    spouse''; but an individual who is legally separated from the 
    taxpayer under a decree of divorce or of separate maintenance shall 
    not be considered as the spouse of the taxpayer; and
        (D) a securities futures contract (as defined in section 1234B) 
    to acquire substantially identical property shall be treated as 
    substantially identical property.

    (3) Where the taxpayer enters into 2 commodity futures transactions 
on the same day, one requiring delivery by him in one market and the 
other requiring delivery to him of the same (or substantially identical) 
commodity in the same calendar month in a different market, and the 
taxpayer subsequently closes both such transactions on the same day, 
subsections (b) and (d) shall have no application to so much of the 
commodity involved in either such transaction as does not exceed in 
quantity the commodity involved in the other.
    (4)(A) In the case of a taxpayer who is a dealer in securities 
(within the meaning of section 1236)--
        (i) if, on the date of a short sale of stock, substantially 
    identical property which is a capital asset in the hands of the 
    taxpayer has been held for not more than 1 year, and
        (ii) if such short sale is closed more than 20 days after the 
    date on which it was made,

subsection (b)(2) shall apply in respect of the holding period of such 
substantially identical property.
    (B) For purposes of subparagraph (A)--
        (i) the last sentence of subsection (b) applies; and
        (ii) the term ``stock'' means any share or certificate of stock 
    in a corporation, any bond or other evidence of indebtedness which 
    is convertible into any such share or certificate, or any evidence 
    of an interest in, or right to subscribe to or purchase, any of the 
    foregoing.

(f) Arbitrage operations in securities

    In the case of a short sale which had been entered into as an 
arbitrage operation, to which sale the rule of subsection (b)(2) would 
apply except as otherwise provided in this subsection--
        (1) subsection (b)(2) shall apply first to substantially 
    identical assets acquired for arbitrage operations held at the close 
    of business on the day such sale is made, and only to the extent 
    that the quantity sold short exceeds the substantially identical 
    assets acquired for arbitrage operations held at the close of 
    business on the day such sale is made, shall the holding period of 
    any other such identical assets held by the taxpayer be affected;
        (2) in the event that assets acquired for arbitrage operations 
    are disposed of in such manner as to create a net short position in 
    assets acquired for arbitrage operations, such net short position 
    shall be deemed to constitute a short sale made on that day;
        (3) for the purpose of paragraphs (1) and (2) of this subsection 
    the taxpayer will be deemed as of the close of any business day to 
    hold property which he is or will be entitled to receive or acquire 
    by virtue of any other asset acquired for arbitrage operations or by 
    virtue of any contract he has entered into in an arbitrage 
    operation; and
        (4) for the purpose of this subsection arbitrage operations are 
    transactions involving the purchase and sale of assets for the 
    purpose of profiting from a current difference between the price of 
    the asset purchased and the price of the asset sold, and in which 
    the asset purchased, if not identical to the asset sold, is such 
    that by virtue thereof the taxpayer is, or will be, entitled to 
    acquire assets identical to the assets sold. Such operations must be 
    clearly identified by the taxpayer in his records as arbitrage 
    operations on the day of the transaction or as soon thereafter as 
    may be practicable. Assets acquired for arbitrage operations will 
    include stocks and securities and the right to acquire stocks and 
    securities.

(g) Hedging transactions

    This section shall not apply in the case of a hedging transaction in 
commodity futures.

(h) Short sales of property which becomes substantially worthless

                           (1) In general

        If--
            (A) the taxpayer enters into a short sale of property, and
            (B) such property becomes substantially worthless,

    the taxpayer shall recognize gain in the same manner as if the short 
    sale were closed when the property becomes substantially worthless. 
    To the extent provided in regulations prescribed by the Secretary, 
    the preceding sentence also shall apply with respect to any option 
    with respect to property, any offsetting notional principal contract 
    with respect to property, any futures or forward contract to deliver 
    any property, and any other similar transaction.

                     (2) Statute of limitations

        If property becomes substantially worthless during a taxable 
    year and any short sale of such property remains open at the time 
    such property becomes substantially worthless, then--
            (A) the statutory period for the assessment of any 
        deficiency attributable to any part of the gain on such 
        transaction shall not expire before the earlier of--
                (i) the date which is 3 years after the date the 
            Secretary is notified by the taxpayer (in such manner as the 
            Secretary may by regulations prescribe) of the substantial 
            worthlessness of such property, or
                (ii) the date which is 6 years after the date the return 
            for such taxable year is filed, and

            (B) such deficiency may be assessed before the date 
        applicable under subparagraph (A) notwithstanding the provisions 
        of any other law or rule of law which would otherwise prevent 
        such assessment.

(Aug. 16, 1954, ch. 736, 68A Stat. 327; Aug. 12, 1955, ch. 871, Sec. 1, 
69 Stat. 717; Pub. L. 85-866, title I, Sec. 52(a), (b), Sept. 2, 1958, 
72 Stat. 1643, 1644; Pub. L. 94-455, title XIV, Sec. 1402(b)(1)(T), (2), 
title XIX, Sec. 1901(a)(137), Oct. 4, 1976, 90 Stat. 1732, 1787; Pub. L. 
97-34, title V, Sec. 501(c), Aug. 13, 1981, 95 Stat. 326; Pub. L. 98-
369, div. A, title X, Sec. 1001(b)(17), (e), July 18, 1984, 98 Stat. 
1012; Pub. L. 105-34, title X, Sec. 1003(b)(1), Aug. 5, 1997, 111 Stat. 
910; Pub. L. 106-554, Sec. 1(a)(7) [title IV, Sec. 401(f)], Dec. 21, 
2000, 114 Stat. 2763, 2763A-649.)


                               Amendments

    2000--Subsec. (e)(2)(D). Pub. L. 106-554 added subpar. (D).
    1997--Subsec. (h). Pub. L. 105-34 added subsec. (h).
    1984--Subsecs. (b), (d), (e)(4)(A)(i). Pub. L. 98-369 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.
    1981--Subsec. (e)(2)(A). Pub. L. 97-34 inserted ``, but does not 
include any position to which section 1092(b) applies'' after 
``taxpayer''.
    1976--Subsec. (b). Pub. L. 94-455, Sec. 1402(b)(2), provided that 
``9 months'' would be changed to ``1 year''.
    Pub. L. 94-455, Sec. 1402(b)(1)(T), (2), provided that ``6 months'' 
would be changed to ``9 months'' for taxable years beginning in 1977.
    Subsec. (c). Pub. L. 94-455, Sec. 1901(a)(137), substituted ``August 
16, 1954'' for ``the date of enactment of this title''.
    Subsecs. (d), (e)(4)(A)(i). Pub. L. 94-455, Sec. 1402(b)(2), 
provided that ``9 months'' would be changed to ``1 year''.
    Pub. L. 94-455, Sec. 1402(b)(1)(T), provided that ``6 months'' would 
be changed to ``9 months'' for taxable years beginning in 1977.
    1958--Subsec. (a). Pub. L. 85-866, Sec. 52(b), struck out ``, other 
than a hedging transaction in commodity futures,'' after ``sale of 
property''.
    Subsec. (e)(4). Pub. L. 85-866, Sec. 52(a), added par. (4).
    Subsec. (g). Pub. L. 85-866, Sec. 52(b), added subsec. (g).
    1955--Subsec. (f). Act Aug. 12, 1955, added subsec. (f).


                    Effective Date of 1997 Amendment

    Section 1003(b)(2) of Pub. L. 105-34 provided that: ``The amendment 
made by paragraph (1) [amending this section] shall apply to property 
which becomes substantially worthless after the date of the enactment of 
this Act [Aug. 5, 1997].''


                    Effective Date of 1984 Amendment

    Amendment by 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 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.
    Amendment by section 1901(a)(137) of Pub. L. 94-455 applicable with 
respect to taxable years beginning after Dec. 31, 1976, see section 
1901(d) of Pub. L. 94-455, set out as a note under section 2 of this 
title.


                    Effective Date of 1958 Amendment

    Amendment by section 52(b) of Pub. L. 85-866 applicable to taxable 
years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see 
section 1(c)(1) of Pub. L. 85-866, set out as a note under section 165 
of this title.
    Section 52(c) of Pub. L. 85-866 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply with respect to 
short sales made after December 31, 1957.''


                    Effective Date of 1955 Amendment

    Section 2 of act Aug. 12, 1955, provided that: ``The amendment made 
by the first section of this Act [amending this section] shall apply 
only with respect to taxable years ending after the date of the 
enactment of this Act [Aug. 12, 1955] and only in the case of a short 
sale of property made by the taxpayer after such date.''

                  Section Referred to in Other Sections

    This section is referred to in sections 1092, 1234 of this title.
