§1258 — Recharacterization of gain from certain financial transactions
4 citing cases
Statute Text — 26 U.S.C. §1258
In the case of any gain—
which (but for this section) would be treated as gain from the sale or exchange of a capital asset, and
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.
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—
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
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.
For purposes of this section, the term “conversion transaction” means any transaction—
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
which is—
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,
an applicable straddle,
any other transaction which is marketed or sold as producing capital gains from a transaction described in paragraph (1), or
any other transaction specified in regulations prescribed by the Secretary.
For purposes of this section—
The term “applicable straddle” means any straddle (within the meaning of section 1092(c)).
The term “applicable rate” means—
the applicable Federal rate determined under section 1274(d) (compounded semiannually) as if the conversion transaction were a debt instrument, or
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).
If any position with a built-in loss becomes part of a conversion transaction—
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
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.
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.
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).
Subsection (a) shall not apply to transactions—
of an options dealer in the normal course of the dealer’s trade or business of dealing in options, or
of a commodities trader in the normal course of the trader’s trade or business of trading section 1256 contracts.
For purposes of this paragraph—
The term “options dealer” has the meaning given such term by section 1256(g)(8).
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.
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 461(k)(4)), subparagraph (A) shall not apply if—
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,
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
the transaction (or the interest in the entity) is a transaction (or interest) specified in regulations prescribed by the Secretary.
Treasury Regulations
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Treas. Reg. §1.1258-1Netting rule for certain conversion transactions
(a) Purpose. The purpose of this section is to provide taxpayers with a method to net certain gains and losses from positions of the same conversion transaction before determining the amount of gain treated as ordinary income under section 1258(a).
(b) Netting of gain and loss for identified transactions—(1) In general. If a taxpayer disposes of or terminates all the positions of an identified netting transaction (as defined in paragraph (b)(2) of this section) within a 14-day period in a single taxable year, all gains and losses on those positions taken into account for Federal tax purposes within that period (other than built-in losses as defined in paragraph (c) of this section) are netted solely for purposes of determining the amount of gain treated as ordinary income under section 1258(a). For purposes of the preceding sentence, a taxpayer is treated as disposing of any position that is treated as sold under any provision of the Code or regulations thereunder (for example, under section 1256(a)(1)).
(2) Identified netting transaction. For purposes of this section, an identified netting transaction is a conversion transaction (as defined in section 1258(c)) that the taxpayer identifies as an identified netting transaction on its books and records. Identification of each position of the conversion transaction must be made before the close of the day on which the position becomes part of the conversion transaction. No particular form of identification is necessary, but all the positions of a single conversion transaction must be identified as part of the same transaction and must be distinguished from all other positions.
(c) Definition of built-in loss. For purposes of this section, built-in loss means—
(1) Built-in loss as defined in section 1258(d)(3)(B); and
(2) If a taxpayer realizes gain or loss on any one position of a conversion transaction (for example, under section 1256), as of the date that gain or loss is realized, any unrecognized loss in any other position of the conversion transaction that is not disposed of, terminated, or treated as sold under any provision of the Code or regulations thereunder within 14 days of and within the same taxable year as the realization event.
(d) Examples. These examples illustrate this section:
(e) Effective date and transition rule—(1) In general. These regulations are effective for conversion transactions that are outstanding on or after December 21, 1995.
(2) Transition rule for identification requirements. In the case of a conversion transaction entered into before February 20, 1996, paragraph (b)(2) of this section is treated as satisfied if the identification is made before the close of business on February 20, 1996.
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Treas. Reg. §1.1258-1(a)Purpose.
Purpose. The purpose of this section is to provide taxpayers with a method to net certain gains and losses from positions of the same conversion transaction before determining the amount of gain treated as ordinary income under section 1258(a).
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Treas. Reg. §1.1258-1(b)Netting of gain and loss for identified transactions—(1) In general.
Netting of gain and loss for identified transactions—(1) In general. If a taxpayer disposes of or terminates all the positions of an identified netting transaction (as defined in paragraph (b)(2) of this section) within a 14-day period in a single taxable year, all gains and losses on those positions taken into account for Federal tax purposes within that period (other than built-in losses as defined in paragraph (c) of this section) are netted solely for purposes of determining the amount of gain treated as ordinary income under section 1258(a). For purposes of the preceding sentence, a taxpayer is treated as disposing of any position that is treated as sold under any provision of the Code or regulations thereunder (for example, under section 1256(a)(1)).
(2) Identified netting transaction. For purposes of this section, an identified netting transaction is a conversion transaction (as defined in section 1258(c)) that the taxpayer identifies as an identified netting transaction on its books and records. Identification of each position of the conversion transaction must be made before the close of the day on which the position becomes part of the conversion transaction. No particular form of identification is necessary, but all the positions of a single conversion transaction must be identified as part of the same transaction and must be distinguished from all other positions.
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Treas. Reg. §1.1258-1(c)Definition of built-in loss.
Definition of built-in loss. For purposes of this section, built-in loss means—
(1) Built-in loss as defined in section 1258(d)(3)(B); and
(2) If a taxpayer realizes gain or loss on any one position of a conversion transaction (for example, under section 1256), as of the date that gain or loss is realized, any unrecognized loss in any other position of the conversion transaction that is not disposed of, terminated, or treated as sold under any provision of the Code or regulations thereunder within 14 days of and within the same taxable year as the realization event.
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Treas. Reg. §1.1258-1(d)Examples.
Examples. These examples illustrate this section:
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Treas. Reg. §1.1258-1(e)Effective date and transition rule—(1) In general.
Effective date and transition rule—(1) In general. These regulations are effective for conversion transactions that are outstanding on or after December 21, 1995.
(2) Transition rule for identification requirements. In the case of a conversion transaction entered into before February 20, 1996, paragraph (b)(2) of this section is treated as satisfied if the identification is made before the close of business on February 20, 1996.