26 USC 1260 - Gains from constructive ownership transactions

U.S Code last checked for updates: May 18, 2024

§ 1260.

Gains from constructive ownership transactions

(a)

In general

If the taxpayer has gain from a constructive ownership transaction with respect to any financial asset and such gain would (without regard to this section) be treated as a long-term capital gain—

(1)

such gain shall be treated as ordinary income to the extent that such gain exceeds the net underlying long-term capital gain, and

(2)

to the extent such gain is treated as a long-term capital gain after the application of paragraph (1), the determination of the capital gain rate (or rates) applicable to such gain under section 1(h) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net underlying long-term capital gain.

(b)

Interest charge on deferral of gain recognition

(1)

In general

(2)

Amount of interest

(3)

Applicable Federal rate

(4)

No credits against increase in tax

Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining—

(A)

the amount of any credit allowable under this chapter, or

(B)

the amount of the tax imposed by section 55.

(c)

Financial asset

For purposes of this section—

(1)

In general

The term “financial asset” means—

(A)

any equity interest in any pass-thru entity, and

(B)

to the extent provided in regulations—

(i)

any debt instrument, and

(ii)

any stock in a corporation which is not a pass-thru entity.

(2)

Pass-thru entity

For purposes of paragraph (1), the term “pass-thru entity” means—

(A)

a regulated investment company,

(B)

a real estate investment trust,

(C)

an S corporation,

(D)

a partnership,

(E)

a trust,

(F)

a common trust fund,

(G)

a passive foreign investment company (as defined in section 1297 without regard to subsection (d) thereof), and

(H)

a REMIC.

(d)

Constructive ownership transaction

For purposes of this section—

(1)

In general

The taxpayer shall be treated as having entered into a constructive ownership transaction with respect to any financial asset if the taxpayer—

(A)

holds a long position under a notional principal contract with respect to the financial asset,

(B)

enters into a forward or futures contract to acquire the financial asset,

(C)

is the holder of a call option, and is the grantor of a put option, with respect to the financial asset and such options have substantially equal strike prices and substantially contemporaneous maturity dates, or

(D)

to the extent provided in regulations prescribed by the Secretary, enters into one or more other transactions (or acquires one or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.

(2)

Exception for positions which are marked to market

(3)

Long position under notional principal contract

A person shall be treated as holding a long position under a notional principal contract with respect to any financial asset if such person—

(A)

has the right to be paid (or receive credit for) all or substantially all of the investment yield (including appreciation) on such financial asset for a specified period, and

(B)

is obligated to reimburse (or provide credit for) all or substantially all of any decline in the value of such financial asset.

(4)

Forward contract

(e)

Net underlying long-term capital gain

For purposes of this section, in the case of any constructive ownership transaction with respect to any financial asset, the term “net underlying long-term capital gain” means the aggregate net capital gain that the taxpayer would have had if—

(1)

the financial asset had been acquired for fair market value on the date such transaction was opened and sold for fair market value on the date such transaction was closed, and

(2)

only gains and losses that would have resulted from the deemed ownership under paragraph (1) were taken into account.

The amount of the net underlying long-term capital gain with respect to any financial asset shall be treated as zero unless the amount thereof is established by clear and convincing evidence.

(f)

Special rule where taxpayer takes delivery

(g)

Regulations

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

(1)

to permit taxpayers to mark to market constructive ownership transactions in lieu of applying this section, and

(2)

to exclude certain forward contracts which do not convey substantially all of the economic return with respect to a financial asset.

(Added Pub. L. 106–170, title V, § 534(a), Dec. 17, 1999, 113 Stat. 1931; amended Pub. L. 108–357, title IV, § 413(c)(23), Oct. 22, 2004, 118 Stat. 1509; Pub. L. 110–172, § 11(a)(23), (24)(B), Dec. 29, 2007, 121 Stat. 2486.)

cite as: 26 USC 1260