United States Code (Last Updated: May 24, 2014) |
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 |
§ 1256. Section 1256 contracts marked to market
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(a) General rule For purposes of this subtitle— (1) each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year), (2) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1), (3) any gain or loss with respect to a section 1256 contract shall be treated as— (A) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and (B) long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and (4) if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle. (b) Section 1256 contract defined (1) In general For purposes of this section, the term “section 1256 contract” means— (A) any regulated futures contract, (B) any foreign currency contract, (C) any nonequity option, (D) any dealer equity option, and (E) any dealer securities futures contract. (2) Exceptions The term “section 1256 contract” shall not include— (A) any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or (B) any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement. (c) Terminations, etc. (1) In general The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.
(2) Special rule where taxpayer takes delivery on or exercises part of straddle If— (A) 2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and (B) the taxpayer takes delivery under or exercises any of such contracts, then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery. (3) Fair market value taken into account For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.
(d) Elections with respect to mixed straddles (1) Election The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle.
(2) Time and manner An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.
(3) Election revocable only with consent An election under paragraph (1) shall apply to the taxpayer’s taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election.
(4) Mixed straddle For purposes of this subsection, the term “mixed straddle” means any straddle (as defined in section 1092(c))— (A) at least 1 (but not all) of the positions of which are section 1256 contracts, and (B) with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle. (e) Mark to market not to apply to hedging transactions (1) Section not to apply Subsection (a) shall not apply in the case of a hedging transaction.
(2) Definition of hedging transaction For purposes of this subsection, the term “hedging transaction” means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.
(3) Special rule for syndicates (A) In general Notwithstanding paragraph (2), the term “hedging transaction” shall not include any transaction entered into by or for a syndicate.
(B) Syndicate defined For purposes of subparagraph (A), the term “syndicate” means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 464(e)(2)).
(C) Holdings attributable to active management For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 464(e)(2))— (i) for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity, (ii) for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity, (iii) if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years, (iv) if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or (v) if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax–avoidance purposes. For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood. (4) Limitation on losses from hedging transactions (A) In general (i) Limitation Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions.
(ii) Carryover of disallowed loss Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year.
(B) Exception where economic loss Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into.
(C) Exception for certain hedging transactions In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1).
(D) Hedging loss The term “hedging loss” means the excess of— (i) the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over (ii) income received or accrued by the taxpayer during such taxable year from such transactions. (E) Unrecognized gain The term “unrecognized gain” has the meaning given to such term by section 1092(a)(3).
(f) Special rules (1) Denial of capital gains treatment for property identified as part of a hedging transaction For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction.
(2) Subsection (a)(3) not to apply to ordinary income property Paragraph (3) of subsection (a) shall not apply to any gain or loss which, but for such paragraph, would be ordinary income or loss.
(3) Capital gain treatment for traders in section 1256 contracts (A) In general For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset.
(B) Exception for certain hedging transactions Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.
(C) Treatment of underlying property For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account.
(4) Special rule for dealer equity options and dealer securities futures contracts of limited partners or limited entrepreneurs In the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))— (A) paragraph (3) of subsection (a) shall not apply to any such gain or loss, and (B) all such gains or losses shall be treated as short-term capital gains or losses, as the case may be. (5) Special rule related to losses Section 1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).
(g) Definitions For purposes of this section— (1) Regulated futures contracts defined The term “regulated futures contract” means a contract— (A) with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and (B) which is traded on or subject to the rules of a qualified board or exchange. (2) Foreign currency contract defined (A) Foreign currency contract The term “foreign currency contract” means a contract— (i) which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts, (ii) which is traded in the interbank market, and (iii) which is entered into at arm’s length at a price determined by reference to the price in the interbank market. (B) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes.
(3) Nonequity option The term “nonequity option” means any listed option which is not an equity option.
(4) Dealer equity option The term “dealer equity option” means, with respect to an options dealer, any listed option which— (A) is an equity option, (B) is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and (C) is listed on the qualified board or exchange on which such options dealer is registered. (5) Listed option The term “listed option” means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange.
(6) Equity option The term “equity option” means any option— (A) to buy or sell stock, or (B) the value of which is determined directly or indirectly by reference to any stock or any narrow-based security index (as defined in section 3(a)(55) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this paragraph). The term “equity option” includes such an option on a group of stocks only if such group meets the requirements for a narrow-based security index (as so defined). The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined). (7) Qualified board or exchange The term “qualified board or exchange” means— (A) a national securities exchange which is registered with the Securities and Exchange Commission, (B) a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or (C) any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section. (8) Options dealer (A) In general The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.
(B) Persons trading in other markets In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term “options dealer” also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section.
(9) Dealer securities futures contract (A) In general The term “dealer securities futures contract” means, with respect to any dealer, any securities futures contract, and any option on such a contract, which— (i) is entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, as the case may be, and (ii) is traded on a qualified board or exchange. (B) Dealer For purposes of subparagraph (A), a person shall be treated as a dealer in securities futures contracts or options on such contracts if the Secretary determines that such person performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A). Such determination shall be made to the extent appropriate to carry out the purposes of this section.
(C) Securities futures contract The term “securities futures contract” has the meaning given to such term by section 1234B.
References In Text
Section 3(a)(55) of the Securities Exchange Act of 1934, referred to in subsec. (g)(6)(B), is classified to section 78c(a)(55) of Title 15, Commerce and Trade.
The date of the enactment of this paragraph, referred to in subsec. (g)(6)(B), probably means the date of enactment of Pub. L. 106–554, which amended subsec. (g)(6) generally and which was approved
Amendments
2010—Subsec. (b). Pub. L. 111–203 redesignated first sentence as par. (1), inserted heading, redesignated former pars. (1) to (5) as subpars. (A) to (E), respectively, of par. (1), added par. (2), and struck out concluding provisions which read as follows: “The term ‘section 1256 contract’ shall not include any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract.”
2005—Subsec. (f)(1). Pub. L. 109–135 substituted “subsection (e)(2)” for “subsection (e)(2)(C)”.
2004—Subsec. (g)(6). Pub. L. 108–311 added at end of concluding provisions “The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined).”
2002—Subsec. (f)(5). Pub. L. 107–147 added par. (5).
2000—Subsec. (b). Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(1)(A)], added par. (5) and concluding provisions.
Subsec. (f)(4). Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(2)], inserted “and dealer securities futures contracts” after “dealer equity options” in heading and “, or dealer securities futures contracts,” after “dealer equity options” in introductory provisions.
Subsec. (g)(6). Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(3)], amended heading and text of par. (6) generally. Prior to amendment, text read as follows:
“(A) In general.—Except as provided in subparagraph (B), the term ‘equity option’ means any option—
“(i) to buy or sell stock, or
“(ii) the value of which is determined directly or indirectly by reference to any stock (or group of stocks) or stock index.
“(B) Exception for certain options regulated by commodities futures trading commission.—The term ‘equity option’ does not include any option with respect to any group of stocks or stock index if—
“(i) there is in effect a designation by the Commodities Futures Trading Commission of a contract market for a contract based on such group of stocks or index, or
“(ii) the Secretary determines that such option meets the requirements of law for such a designation.”
Subsec. (g)(9). Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(1)(B)], added par. (9).
1999—Subsec. (e)(2). Pub. L. 106–170 reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “For purposes of this subsection, the term ‘hedging transaction’ means any transaction if—
“(A) such transaction is entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—
“(i) to reduce risk of price change or currency fluctuations with respect to property which is held or to be held by the taxpayer, or
“(ii) to reduce risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer,
“(B) the gain or loss on such transactions is treated as ordinary income or loss, and
“(C) before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.”
1986—Subsec. (e)(4), (5). Pub. L. 99–514 redesignated par. (5) as (4) and struck out former par. (4), special rule for banks, which read as follows: “In the case of a bank (as defined in section 581), subparagraph (A) of paragraph (2) shall be applied without regard to clause (i) or (ii) thereof.”
1984—Pub. L. 98–369, § 102(e)(5), substituted “Section 1256 contracts” for “Regulated futures contracts” in section catchline.
Subsec. (a)(1), (3), (4). Pub. L. 98–369, § 102(a)(1), substituted “section 1256 contract” for “regulated futures contract” and “section 1256 contracts” for “regulated futures contracts” wherever appearing.
Subsec. (b). Pub. L. 98–369, § 102(a)(2), in par. (1), substituted “any regulated futures contract” for “with respect to which the amount required to be deposited and the amount which may be withdrawn depends on the system of marking to market; and”, in par. (2), substituted “any foreign currency contract,” for “which is traded on or subject to the rules of a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission or of any board of trade or exchange which the Secretary determines has rules adequate to carry out the purposes of this section. Such term includes any foreign currency contract.”, and added pars. (3) and (4).
Subsec. (c)(1). Pub. L. 98–369, § 102(a)(1)(A), (e)(1)(A), substituted “section 1256 contracts” for “regulated futures contracts”, and “by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse,” for “by taking or making delivery,”.
Subsec. (c)(2). Pub. L. 98–369, § 102(e)(1)(C), substituted “takes delivery on or exercises” for “takes delivery on” in heading.
Subsec. (c)(2)(A). Pub. L. 98–369, § 102(a)(1)(B), substituted “section 1256 contracts” for “regulated futures contracts”.
Subsec. (c)(2)(B). Pub. L. 98–369, § 102(e)(1)(B), substituted “takes delivery under or exercises” for “takes delivery under”.
Subsec. (d)(1), (4)(A). Pub. L. 98–369, § 102(a)(1)(B), substituted “section 1256 contracts” for “regulated futures contracts”.
Subsec. (d)(4)(B). Pub. L. 98–369, § 102(a)(1)(A), substituted “section 1256 contract” for “regulated futures contract”.
Pub. L. 98–369, § 107(c), inserted “(or such earlier time as the Secretary may prescribe by regulations)”.
Subsec. (e)(2)(C). Pub. L. 98–369, § 107(d), inserted “(or such earlier time as the Secretary may prescribe by regulations”.
Subsec. (e)(5). Pub. L. 98–369, § 104(a), added par. (5).
Subsec. (f)(3), (4). Pub. L. 98–369, § 102(b), added pars. (3) and (4).
Subsec. (g). Pub. L. 98–369, § 102(a)(3), in amending subsec. (g) generally, inserted provisions relating to regulated futures contracts as par. (1), redesignated former pars. (1) and (2) as subpars. (A) and (B), respectively, of par. (2), and added pars. (3) to (8).
Subsec. (g)(1)(A). Pub. L. 98–369, § 722(a)(2), inserted “, or the settlement of which depends on the value of,” after “delivery of”.
1983—Subsec. (b). Pub. L. 97–448, § 105(c)(5)(A), (B), struck out par. (1) which related to contracts requiring delivery of personal property (as defined in section 1092(d)(1)) or an interest in such property, redesignated pars. (2) and (3) as (1) and (2), respectively, and inserted last sentence providing that such term includes any foreign currency contract.
Subsec. (c). Pub. L. 97–448, § 105(c)(1), inserted “, etc.” after “Terminations” in heading and, in text, designated existing first and second sentences as pars. (1) and (3), respectively, added par. (2), inserted “(or transfer)” after “termination” and “(or rights)” after “obligation” in par. (1) as so designated, and substituted “this subsection” for “the preceding sentence” and inserted “(or transfer)” after “termination” in par. (3) as so designated.
Subsec. (d)(4)(B). Pub. L. 97–448, § 105(c)(2), substituted “day on which the first regulated futures contract forming part of the straddle is acquired” for “day on which such position is acquired”.
Subsec. (e)(3)(C)(v). Pub. L. 97–448, § 105(c)(3), inserted “(by regulations or otherwise)” after “determines”.
Subsec. (g). Pub. L. 97–448, § 105(c)(5)(C), added subsec. (g).
1982—Subsec. (e)(3)(B). Pub. L. 97–354 substituted “an S corporation” for “an electing small business corporation within the meaning of section 1371(b)”.
Effective Date Of Amendment
Amendment by Pub. L. 111–203 effective 1 day after
Pub. L. 111–203, title XVI, § 1601(b),
Amendment by Pub. L. 108–311 effective as if included in section 401 of the Community Renewal Tax Relief Act of 2000 [H.R. 5662, as enacted by Pub. L. 106–554], see section 405(b) of Pub. L. 108–311, set out as a note under section 1234B of this title.
Pub. L. 107–147, title IV, § 416(b)(2),
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
Amendment by Pub. L. 99–514 applicable to taxable years beginning after
Pub. L. 98–369, div. A, title I, § 102(f)–(j),
Pub. L. 98–369, div. A, title I, § 104(b),
Amendment by section 107(c), (d) of Pub. L. 98–369 applicable to positions entered into after
Amendment by section 722(a)(2) of Pub. L. 98–369 effective as if included in the provisions of the Technical Corrections Act of 1984, Pub. L. 97–448, to which such amendment relates, see section 722(a)(6) of Pub. L. 98–369, set out as a note under section 172 of this title.
Amendment by Pub. L. 97–448 effective, except as otherwise provided, as if it had been included in the provision of the Economic Recovery Tax Act of 1981, Pub. L. 97–34, to which such amendment relates, see section 109 of Pub. L. 97–448, set out as a note under section 1 of this title.
Pub. L. 97–448, title I, § 105(c)(5)(D),
Amendment by Pub. L. 97–354 applicable to taxable years beginning after
Effective Date
Section (other than subsec. (e)(2)(C)) applicable to property acquired and positions established by the taxpayer after
Miscellaneous
Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(4)],
Pub. L. 97–34, title V, § 509,