
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: 26USC1259]

 
                     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. 1259. Constructive sales treatment for appreciated 
        financial positions
        

(a) In general

    If there is a constructive sale of an appreciated financial 
position--
        (1) the taxpayer shall recognize gain as if such position were 
    sold, assigned, or otherwise terminated at its fair market value on 
    the date of such constructive sale (and any gain shall be taken into 
    account for the taxable year which includes such date), and
        (2) for purposes of applying this title for periods after the 
    constructive sale--
            (A) proper adjustment shall be made in the amount of any 
        gain or loss subsequently realized with respect to such position 
        for any gain taken into account by reason of paragraph (1), and
            (B) the holding period of such position shall be determined 
        as if such position were originally acquired on the date of such 
        constructive sale.

(b) Appreciated financial position

    For purposes of this section--

                           (1) In general

        Except as provided in paragraph (2), the term ``appreciated 
    financial position'' means any position with respect to any stock, 
    debt instrument, or partnership interest if there would be gain were 
    such position sold, assigned, or otherwise terminated at its fair 
    market value.

                           (2) Exceptions

        The term ``appreciated financial position'' shall not include--
            (A) any position with respect to debt if--
                (i) the position unconditionally entitles the holder to 
            receive a specified principal amount,
                (ii) the interest payments (or other similar amounts) 
            with respect to such position meet the requirements of 
            clause (i) of section 860G(a)(1)(B), and
                (iii) such position is not convertible (directly or 
            indirectly) into stock of the issuer or any related person,

            (B) any hedge with respect to a position described in 
        subparagraph (A), and
            (C) any position which is marked to market under any 
        provision of this title or the regulations thereunder.

                            (3) Position

        The term ``position'' means an interest, including a futures or 
    forward contract, short sale, or option.

(c) Constructive sale

    For purposes of this section--

                           (1) In general

        A taxpayer shall be treated as having made a constructive sale 
    of an appreciated financial position if the taxpayer (or a related 
    person)--
            (A) enters into a short sale of the same or substantially 
        identical property,
            (B) enters into an offsetting notional principal contract 
        with respect to the same or substantially identical property,
            (C) enters into a futures or forward contract to deliver the 
        same or substantially identical property,
            (D) in the case of an appreciated financial position that is 
        a short sale or a contract described in subparagraph (B) or (C) 
        with respect to any property, acquires the same or substantially 
        identical property, or
            (E) to the extent prescribed by the Secretary in 
        regulations, enters into 1 or more other transactions (or 
        acquires 1 or more positions) that have substantially the same 
        effect as a transaction described in any of the preceding 
        subparagraphs.

       (2) Exception for sales of nonpublicly traded property

        The term ``constructive sale'' shall not include any contract 
    for sale of any stock, debt instrument, or partnership interest 
    which is not a marketable security (as defined in section 453(f)) if 
    the contract settles within 1 year after the date such contract is 
    entered into.

            (3) Exception for certain closed transactions

        (A) In general

            In applying this section, there shall be disregarded any 
        transaction (which would otherwise be treated as a constructive 
        sale) during the taxable year if--
                (i) such transaction is closed before the end of the 
            30th day after the close of such taxable year,
                (ii) the taxpayer holds the appreciated financial 
            position throughout the 60-day period beginning on the date 
            such transaction is closed, and
                (iii) at no time during such 60-day period is the 
            taxpayer's risk of loss with respect to such position 
            reduced by reason of a circumstance which would be described 
            in section 246(c)(4) if references to stock included 
            references to such position.

        (B) Treatment of positions which are reestablished

            If--
                (i) a transaction, which would otherwise be treated as a 
            constructive sale of an appreciated financial position, is 
            closed during the taxable year or during the 30 days 
            thereafter, and
                (ii) another substantially similar transaction is 
            entered into during the 60-day period beginning on the date 
            the transaction referred to in clause (i) is closed--
                    (I) which also would otherwise be treated as a 
                constructive sale of such position,
                    (II) which is closed before the 30th day after the 
                close of the taxable year in which the transaction 
                referred to in clause (i) occurs, and
                    (III) which meets the requirements of clauses (ii) 
                and (iii) of subparagraph (A),

        the transaction referred to in clause (ii) shall be disregarded 
        for purposes of determining whether the requirements of 
        subparagraph (A)(iii) are met with respect to the transaction 
        described in clause (i).

                         (4) Related person

        A person is related to another person with respect to a 
    transaction if--
            (A) the relationship is described in section 267(b) or 
        707(b), and
            (B) such transaction is entered into with a view toward 
        avoiding the purposes of this section.

(d) Other definitions

    For purposes of this section--

                        (1) Forward contract

        The term ``forward contract'' means a contract to deliver a 
    substantially fixed amount of property (including cash) for a 
    substantially fixed price.

             (2) Offsetting notional principal contract

        The term ``offsetting notional principal contract'' means, with 
    respect to any property, an agreement which includes--
            (A) a requirement to pay (or provide credit for) all or 
        substantially all of the investment yield (including 
        appreciation) on such property for a specified period, and
            (B) a right to be reimbursed for (or receive credit for) all 
        or substantially all of any decline in the value of such 
        property.

(e) Special rules

       (1) Treatment of subsequent sale of position which was 
                                 deemed sold

        If--
            (A) there is a constructive sale of any appreciated 
        financial position,
            (B) such position is subsequently disposed of, and
            (C) at the time of such disposition, the transaction 
        resulting in the constructive sale of such position is open with 
        respect to the taxpayer or any related person,

    solely for purposes of determining whether the taxpayer has entered 
    into a constructive sale of any other appreciated financial position 
    held by the taxpayer, the taxpayer shall be treated as entering into 
    such transaction immediately after such disposition. For purposes of 
    the preceding sentence, an assignment or other termination shall be 
    treated as a disposition.

           (2) Certain trust instruments treated as stock

        For purposes of this section, an interest in a trust which is 
    actively traded (within the meaning of section 1092(d)(1)) shall be 
    treated as stock unless substantially all (by value) of the property 
    held by the trust is debt described in subsection (b)(2)(A).

                 (3) Multiple positions in property

        If a taxpayer holds multiple positions in property, the 
    determination of whether a specific transaction is a constructive 
    sale and, if so, which appreciated financial position is deemed sold 
    shall be made in the same manner as actual sales.

(f) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this section.

(Added Pub. L. 105-34, title X, Sec. 1001(a), Aug. 5, 1997, 111 Stat. 
903; amended Pub. L. 105-206, title VI, Sec. 6010(a)(1), (2), July 22, 
1998, 112 Stat. 812, 813.)


                               Amendments

    1998--Subsec. (b)(2)(A)(i) to (iii). Pub. L. 105-206, 
Sec. 6010(a)(1)(A), substituted ``position'' for ``debt''.
    Subsec. (b)(2)(B), (C). Pub. L. 105-206, Sec. 6010(a)(1)(B), (C), 
added subpar. (B) and redesignated former subpar. (B) as (C).
    Subsec. (d)(1). Pub. L. 105-206, Sec. 6010(a)(2), inserted 
``(including cash)'' after ``property''.


                    Effective Date of 1998 Amendment

    Amendment by Pub. L. 105-206 effective, except as otherwise 
provided, as if included in the provisions of the Taxpayer Relief Act of 
1997, Pub. L. 105-34, to which such amendment relates, see section 6024 
of Pub. L. 105-206, set out as a note under section 1 of this title.


                             Effective Date

    Section applicable to any constructive sale after June 8, 1997, with 
certain exceptions, see section 1001(d) of Pub. L. 105-34, set out as an 
Effective Date of 1997 Amendment note under section 475 of this title.

                  Section Referred to in Other Sections

    This section is referred to in section 475 of this title.
