
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1234]

 
                     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. 1234. Options to buy or sell


(a) Treatment of gain or loss in the case of the purchaser

                          (1) General rule

        Gain or loss attributable to the sale or exchange of, or loss 
    attributable to failure to exercise, an option to buy or sell 
    property shall be considered gain or loss from the sale or exchange 
    of property which has the same character as the property to which 
    the option relates has in the hands of the taxpayer (or would have 
    in the hands of the taxpayer if acquired by him).

        (2) Special rule for loss attributable to failure to 
                               exercise option

        For purposes of paragraph (1), if loss is attributable to 
    failure to exercise an option, the option shall be deemed to have 
    been sold or exchanged on the day it expired.

                  (3) Nonapplication of subsection

        This subsection shall not apply to--
            (A) an option which constitutes property described in 
        paragraph (1) of section 1221(a);
            (B) in the case of gain attributable to the sale or exchange 
        of an option, any income derived in connection with such option 
        which, without regard to this subsection, is treated as other 
        than gain from the sale or exchange of a capital asset; and
            (C) a loss attributable to failure to exercise an option 
        described in section 1233(c).

(b) Treatment of grantor of option in the case of stock, securities, or 
        commodities

                          (1) General rule

        In the case of the grantor of the option, gain or loss from any 
    closing transaction with respect to, and gain on lapse of, an option 
    in property shall be treated as a gain or loss from the sale or 
    exchange of a capital asset held not more than 1 year.

                           (2) Definitions

        For purposes of this subsection--

         (A) Closing transaction

            The term ``closing transaction'' means any termination of 
        the taxpayer's obligation under an option in property other than 
        through the exercise or lapse of the option.

         (B) Property

            The term ``property'' means stocks and securities (including 
        stocks and securities dealt with on a ``when issued'' basis), 
        commodities, and commodity futures.

                  (3) Nonapplication of subsection

        This subsection shall not apply to any option granted in the 
    ordinary course of the taxpayer's trade or business of granting 
    options.

(c) Treatment of options on section 1256 contracts and cash settlement 
        options

                     (1) Section 1256 contracts

        Gain or loss shall be recognized on the exercise of an option on 
    a section 1256 contract (within the meaning of section 1256(b)).

              (2) Treatment of cash settlement options

        (A) In general

            For purposes of subsections (a) and (b), a cash settlement 
        option shall be treated as an option to buy or sell property.

        (B) Cash settlement option

            For purposes of subparagraph (A), the term ``cash settlement 
        option'' means any option which on exercise settles in (or could 
        be settled in) cash or property other than the underlying 
        property.

(Aug. 16, 1954, ch. 376, 68A Stat. 329; Pub. L. 85-866, title I, 
Sec. 53, Sept. 2, 1958, 72 Stat. 1644; Pub. L. 89-809, title II, 
Sec. 210(a), Nov. 13, 1966, 80 Stat. 1580; Pub. L. 94-455, title XIV, 
Sec. 1402(b)(1)(U), (2), title XXI, Sec. 2136(a), Oct. 4, 1976, 90 Stat. 
1732, 1929; Pub. L. 98-369, div. A, title I, Sec. 105(a), title X, 
Sec. 1001(b)(18), (e), July 18, 1984, 98 Stat. 629, 1012; Pub. L. 106-
170, title V, Sec. 532(c)(1)(H), Dec. 17, 1999, 113 Stat. 1930.)


                               Amendments

    1999--Subsec. (a)(3)(A). Pub. L. 106-170 substituted ``section 
1221(a)'' for ``section 1221''.
    1984--Subsec. (b)(1). Pub. L. 98-369, Sec. 1001(b)(18), (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. 105(a), added subsec. (c).
    1976--Subsec. (a). Pub. L. 94-455, Sec. 2136(a), inserted in heading 
``in the case of the purchaser''; designated existing provisions as par. 
``(1) General rule'' and substituted ``an option'' and ``the option'' 
for ``a privilege or option'' and ``the option or privilege''; 
redesignated existing subsec. (b) as par. (2) and substituted ``an 
option'' and ``the option'' for ``a privilege or option'' and ``the 
privilege or option''; and redesignated existing subsec. (d)(1) to (3) 
as par. (3)(A) to (C) and substituted in heading and introductory text 
``Nonapplication'' and ``subsection'' for ``Non-application'' and 
``section'', in par. (3)(A) ``an option'' for ``a privilege or option'', 
in par. (3)(B) ``an option'', ``such option'' and ``subsection'' for ``a 
privilege or option'', ``such privilege or option'' and ``section'' and 
in par. (3)(C) substituted a period for ``; or''.
    Subsec. (b). Pub. L. 94-455, Sec. 2136(a), added subsec. (b), 
incorporating provisions of a prior subsec. (c) providing for a special 
rule for grantors of straddles, par. (1) relating to ``gain on lapse'' 
and reading ``In the case of gain on lapse of an option granted by the 
taxpayer as part of a straddle, the gain shall be deemed to be gain from 
the sale or exchange of a capital asset held for not more than 6 months 
on the day that the option expired.''; par. (2) relating to 
``exception'' and reading ``This subsection shall not apply to any 
person who holds securities for sale to customers in the ordinary course 
of his trade or business.'', now covered in subsec. (b)(3); and par. (3) 
relating to definitions of ``straddle'' and ``security''.
    Subsec. (b)(1). 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)(U), provided that ``6 months'' would 
be changed to ``9 months'' for taxable years beginning in 1977.
    Subsec. (c). Pub. L. 94-455, Sec. 2136(a), struck out provision 
respecting special rule for grantors of straddles, the paragraphs 
relating to: (1) gain on lapse; (2) exception, now covered in subsec. 
(b)(3); and (3) definitions of ``straddle'' and ``security'', such 
provision now covered generally by subsec. (b) of this section.
    Subsec. (d). Pub. L. 94-455, Sec. 2136(a), struck out provision 
respecting non-application of section, pars. (1) to (3) now covered in 
subsec. (a)(3)(A) to (C) of this section, and par. (4) providing for 
such non-application to gain attributable to the sale or exchange of a 
privilege or option acquired by the taxpayer before Mar. 1, 1954, if in 
the hands of the taxpayer such privilege or option was a capital asset.
    1966--Subsecs. (c), (d). Pub. L. 89-809 added subsec. (c) and 
redesignated former subsec. (c) as (d).
    1958--Pub. L. 85-866 amended section generally and among other 
changes provided in subsec. (a) that gain or loss resulting from option 
to buy or sell property is to be considered gain or loss arising from 
property which has the same character as the property underlying the 
option, incorporated existing provisions in subsecs. (b) and (c)(3), and 
inserted provisions set out in subsec. (c)(1), (2), (4).


                    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 105(b) of Pub. L. 98-369 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to options 
purchased or granted after October 31, 1983, in taxable years ending 
after such date.''
    Amendment by section 1001(b)(18) 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 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.
    Section 2136(b) of Pub. L. 94-455 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to options 
granted after September 1, 1976.''


                    Effective Date of 1966 Amendment

    Section 210(b) of Pub. L. 89-809 provided that: ``The amendments 
made by subsection (a) [amending this section] shall apply to straddle 
transactions entered into after January 25, 1965, in taxable years 
ending after such date.''


                    Effective Date of 1958 Amendment

    Amendment by 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 Referred to in Other Sections

    This section is referred to in section 1233 of this title.
