
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: 26USC1258]

 
                     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. 1258. Recharacterization of gain from certain financial 
        transactions
        

(a) General rule

    In the case of any gain--
        (1) which (but for this section) would be treated as gain from 
    the sale or exchange of a capital asset, and
        (2) which is recognized on the disposition or other termination 
    of any position which was held as part of a conversion transaction,

such gain (to the extent such gain does not exceed the applicable 
imputed income amount) shall be treated as ordinary income.

(b) Applicable imputed income amount

    For purposes of subsection (a), the term ``applicable imputed income 
amount'' means, with respect to any disposition or other termination 
referred to in subsection (a), an amount equal to--
        (1) the amount of interest which would have accrued on the 
    taxpayer's net investment in the conversion transaction for the 
    period ending on the date of such disposition or other termination 
    (or, if earlier, the date on which the requirements of subsection 
    (c) ceased to be satisfied) at a rate equal to 120 percent of the 
    applicable rate, reduced by
        (2) the amount treated as ordinary income under subsection (a) 
    with respect to any prior disposition or other termination of a 
    position which was held as a part of such transaction.

The Secretary shall by regulations provide for such reductions in the 
applicable imputed income amount as may be appropriate by reason of 
amounts capitalized under section 263(g), ordinary income received, or 
otherwise.

(c) Conversion transaction

    For purposes of this section, the term ``conversion transaction'' 
means any transaction--
        (1) substantially all of the taxpayer's expected return from 
    which is attributable to the time value of the taxpayer's net 
    investment in such transaction, and
        (2) which is--
            (A) the holding of any property (whether or not actively 
        traded), and the entering into a contract to sell such property 
        (or substantially identical property) at a price determined in 
        accordance with such contract, but only if such property was 
        acquired and such contract was entered into on a substantially 
        contemporaneous basis,
            (B) an applicable straddle,
            (C) any other transaction which is marketed or sold as 
        producing capital gains from a transaction described in 
        paragraph (1), or
            (D) any other transaction specified in regulations 
        prescribed by the Secretary.

(d) Definitions and special rules

    For purposes of this section--

                       (1) Applicable straddle

        The term ``applicable straddle'' means any straddle (within the 
    meaning of section 1092(c)); except that the term ``personal 
    property'' shall include stock.

                         (2) Applicable rate

        The term ``applicable rate'' means--
            (A) the applicable Federal rate determined under section 
        1274(d) (compounded semiannually) as if the conversion 
        transaction were a debt instrument, or
            (B) if the term of the conversion transaction is indefinite, 
        the Federal short-term rates in effect under section 6621(b) 
        during the period of the conversion transaction (compounded 
        daily).

                  (3) Treatment of built-in losses

        (A) In general

            If any position with a built-in loss becomes part of a 
        conversion transaction--
                (i) for purposes of applying this subtitle to such 
            position for periods after such position becomes part of 
            such transaction, such position shall be taken into account 
            at its fair market value as of the time it became part of 
            such transaction, except that
                (ii) upon the disposition or other termination of such 
            position in a transaction in which gain or loss is 
            recognized, such built-in loss shall be recognized and shall 
            have a character determined without regard to this section.

        (B) Built-in loss

            For purposes of subparagraph (A), the term ``built-in loss'' 
        means the loss (if any) which would have been realized if the 
        position had been disposed of or otherwise terminated at its 
        fair market value as of the time such position became part of 
        the conversion transaction.

        (4) Position taken into account at fair market value

        In determining the taxpayer's net investment in any conversion 
    transaction, there shall be included the fair market value of any 
    position which becomes part of such transaction (determined as of 
    the time such position became part of such transaction).

    (5) Special rule for options dealers and commodities traders

        (A) In general

            Subsection (a) shall not apply to transactions--
                (i) of an options dealer in the normal course of the 
            dealer's trade or business of dealing in options, or
                (ii) of a commodities trader in the normal course of the 
            trader's trade or business of trading section 1256 
            contracts.

        (B) Definitions

            For purposes of this paragraph--
            (i) Options dealer

                The term ``options dealer'' has the meaning given such 
            term by section 1256(g)(8).
            (ii) Commodities trader

                The term ``commodities trader'' means any person who is 
            a member (or, except as otherwise provided in regulations, 
            is entitled to trade as a member) of a domestic board of 
            trade which is designated as a contract market by the 
            Commodity Futures Trading Commission.

        (C) Limited partners and limited entrepreneurs

            In the case of any gain from a transaction recognized by an 
        entity which is allocable to a limited partner or limited 
        entrepreneur (within the meaning of section 464(e)(2)), 
        subparagraph (A) shall not apply if--
                (i) substantially all of the limited partner's (or 
            limited entrepreneur's) expected return from the entity is 
            attributable to the time value of the partner's (or 
            entrepreneur's) net investment in such entity,
                (ii) the transaction (or the interest in the entity) was 
            marketed or sold as producing capital gains treatment from a 
            transaction described in subsection (c)(1), or
                (iii) the transaction (or the interest in the entity) is 
            a transaction (or interest) specified in regulations 
            prescribed by the Secretary.

(Added Pub. L. 103-66, title XIII, Sec. 13206(a)(1), Aug. 10, 1993, 107 
Stat. 462.)


                             Effective Date

    Section 13206(a)(3) of Pub. L. 103-66, as amended by Pub. L. 104-
188, title I, Sec. 1703(n)(11), Aug. 20, 1996, 110 Stat. 1877, provided 
that: ``The amendments made by this subsection [enacting this section] 
shall apply to conversion transactions entered into after April 30, 
1993.''
