26 U.S.C. § 1233 — Gains and losses from short sales

Page 2332 TITLE 26—INTERNAL REVENUE CODE [§§ 1232 to 1232B EFFECTIVE DATE OF 1999 AMENDMENT Amendment by Pub. L. 106–170 applicable to any in- strument held, acquired, or entered into, any trans- action entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title I, § 176(b), July 18, 1984, 98 Stat. 709, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to net section 1231 gains for taxable years beginning after De- cember 31, 1984.’’ Amendment by section 711(c)(2)(A)(iii) of Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1983, see section 711(c)(2)(A)(v) of Pub. L. 98–369, set out as a note under section 165 of this title. Amendment by section 1001(b)(15) of Pub. L. 98–369 ap- plicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title. EFFECTIVE DATE OF 1981 AMENDMENT Amendment by Pub. L. 97–34 applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on June 23, 1981, see section 508 of Pub. L. 97–34, set out as an Effective Date note under section 1092 of this title. EFFECTIVE DATE OF 1978 AMENDMENT Pub. L. 95–600, title VII, § 701(ee)(2), Nov. 6, 1978, 92 Stat. 2924, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall apply with respect to sales, exchanges, and contributions made after October 4, 1976.’’ EFFECTIVE DATE OF 1976 AMENDMENT Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years begin- ning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years begin- ning after Dec. 31, 1977. EFFECTIVE DATE OF 1969 AMENDMENT Pub. L. 91–172, title II, § 212(b)(2), Dec. 30, 1969, 83 Stat. 571, provided that: ‘‘The amendments made by para- graph (1) [amending this section] shall apply to live- stock acquired after December 31, 1969.’’ Amendment by section 514(b)(2) of Pub. L. 91–172 ap- plicable to sales and other dispositions occurring after July 25, 1969, see section 514(c) of Pub. L. 91–172, set out as a note under section 1221 of this title. Amendment by section 516(b) of Pub. L. 91–172 appli- cable to taxable years beginning after Dec. 31, 1969, see section 516(d)(2) of Pub. L. 91–172, set out as a note under section 1001 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88–272 applicable with respect to amounts received or accrued in taxable years begin- ning after Dec. 31, 1963, attributable to iron ore mined in such years, see section 227(c) of Pub. L. 88–272, set out as a note under section 272 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Pub. L. 85–866, title I, § 49(b), Sept. 2, 1958, 72 Stat. 1642, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to tax- able years beginning after December 31, 1957.’’ [§§ 1232 to 1232B. Repealed. Pub. L. 98–369, div. A, title I, § 42(a)(1), July 18, 1984, 98 Stat. 556] Section 1232, acts Aug. 16, 1954, ch. 736, 68A Stat. 326; Sept. 2, 1958, Pub. L. 85–866, title I, §§ 50(a), 51, 72 Stat. 1642, 1643; June 25, 1959, Pub. L. 86–69, § 3(e), 73 Stat. 140; Sept. 2, 1964, Pub. L. 88–563, § 5, 78 Stat. 845; Dec. 30, 1969, Pub. L. 91–172, title IV, § 413(a), (b), 83 Stat. 609, 611; Oct. 4, 1976, Pub. L. 94–455, title XIV, § 1402(b)(1)(S), (2), title XIX, §§ 1901(b)(3)(I), (14)(D), 1904(b)(10)(C), 90 Stat. 1732, 1793, 1796, 1817; Aug. 13, 1981, Pub. L. 97–34, title V, § 505(b), 95 Stat. 331; Sept. 3, 1982, Pub. L. 97–248, title II, §§ 231(c), 232(b), title III, § 310(b)(6), 96 Stat. 499, 501, 599; Jan. 12, 1983, Pub. L. 97–448, title III, § 306(a)(9)(B), (C)(i), (ii), 96 Stat. 2403, 2404; July 18, 1984, Pub. L. 98–369, div. A, title X, § 1001(b)(16), (d), (e), 98 Stat. 1012, related to bonds and other evidences of in- debtedness. See section 1271 et seq. of this title. Section 1232A, added Pub. L. 97–248, title II, § 231(a), Sept. 3, 1982, 96 Stat. 496; amended Pub. L. 98–369, div. A, title II, § 211(b)(17), July 18, 1984, 98 Stat. 756, related to original issue discount. See section 1271 et seq. of this title. Section 1232B, added Pub. L. 97–248, title II, § 232(a), Sept. 3, 1982, 96 Stat. 499, related to stripped bonds. See section 1286 of this title. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Repeal applicable to taxable years ending after July 18, 1984, see section 44 of Pub. L. 98–369, set out as an Effective Date note under section 1271 of this title. § 1233. Gains and losses from short sales (a) Capital assets For purposes of this subtitle, gain or loss from the short sale of property shall be considered as gain or loss from the sale or exchange of a cap- ital asset to the extent that the property, in- cluding a commodity future, used to close the short sale constitutes a capital asset in the hands of the taxpayer. (b) Short-term gains and holding periods If gain or loss from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date of such short sale substantially identical property has been held by the taxpayer for not more than 1 year (determined without regard to the effect, under paragraph (2) of this sub- section, of such short sale on the holding pe- riod), or if substantially identical property is ac- quired by the taxpayer after such short sale and on or before the date of the closing thereof— (1) any gain on the closing of such short sale shall be considered as a gain on the sale or ex- change of a capital asset held for not more than 1 year (notwithstanding the period of time any property used to close such short sale has been held); and (2) the holding period of such substantially identical property shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such prop- erty, whichever date occurs first. This para- graph shall apply to such substantially iden- tical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short. For purposes of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the exer- cise or failure to exercise such option shall be considered as a closing of such short sale. Page 2333 TITLE 26—INTERNAL REVENUE CODE § 1233 (c) Certain options to sell Subsection (b) shall not include an option to sell property at a fixed price acquired on the same day on which the property identified as in- tended to be used in exercising such option is ac- quired and which, if exercised, is exercised through the sale of the property so identified. If the option is not exercised, the cost of the op- tion shall be added to the basis of the property with which the option is identified. This sub- section shall apply only to options acquired after August 16, 1954. (d) Long-term losses If on the date of such short sale substantially identical property has been held by the taxpayer for more than 1 year, any loss on the closing of such short sale shall be considered as a loss on the sale or exchange of a capital asset held for more than 1 year (notwithstanding the period of time any property used to close such short sale has been held, and notwithstanding section 1234). (e) Rules for application of section (1) Subsection (b)(1) or (d) shall not apply to the gain or loss, respectively, on any quantity of property used to close such short sale which is in excess of the quantity of the substantially identical property referred to in the applicable subsection. (2) For purposes of subsections (b) and (d)— (A) the term ‘‘property’’ includes only stocks and securities (including stocks and se- curities dealt with on a ‘‘when issued’’ basis), and commodity futures, which are capital as- sets in the hands of the taxpayer, but does not include any position to which section 1092(b) applies; (B) in the case of futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, a com- modity future requiring delivery in 1 calendar month shall not be considered as property sub- stantially identical to another commodity fu- ture requiring delivery in a different calendar month; (C) in the case of a short sale of property by an individual, the term ‘‘taxpayer’’, in the ap- plication of this subsection and subsections (b) and (d), shall be read as ‘‘taxpayer or his spouse’’; but an individual who is legally sepa- rated from the taxpayer under a decree of di- vorce or of separate maintenance shall not be considered as the spouse of the taxpayer; (D) a securities futures contract (as defined in section 1234B) to acquire substantially iden- tical property shall be treated as substantially identical property; and (E) entering into a securities futures con- tract (as so defined) to sell shall be considered to be a short sale, and the settlement of such contract shall be considered to be the closing of such short sale. (3) Where the taxpayer enters into 2 com- modity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a different market, and the taxpayer subsequently closes both such transactions on the same day, subsections (b) and (d) shall have no application to so much of the commodity involved in either such trans- action as does not exceed in quantity the com- modity involved in the other. (4)(A) In the case of a taxpayer who is a dealer in securities (within the meaning of section 1236)— (i) if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 1 year, and (ii) if such short sale is closed more than 20 days after the date on which it was made, subsection (b)(2) shall apply in respect of the holding period of such substantially identical property. (B) For purposes of subparagraph (A)— (i) the last sentence of subsection (b) applies; and (ii) the term ‘‘stock’’ means any share or certificate of stock in a corporation, any bond or other evidence of indebtedness which is con- vertible into any such share or certificate, or any evidence of an interest in, or right to sub- scribe to or purchase, any of the foregoing. (f) Arbitrage operations in securities In the case of a short sale which had been en- tered into as an arbitrage operation, to which sale the rule of subsection (b)(2) would apply ex- cept as otherwise provided in this subsection— (1) subsection (b)(2) shall apply first to sub- stantially identical assets acquired for arbi- trage operations held at the close of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially identical assets acquired for arbitrage operations held at the close of busi- ness on the day such sale is made, shall the holding period of any other such identical as- sets held by the taxpayer be affected; (2) in the event that assets acquired for arbi- trage operations are disposed of in such man- ner as to create a net short position in assets acquired for arbitrage operations, such net short position shall be deemed to constitute a short sale made on that day; (3) for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to re- ceive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered into in an arbi- trage operation; and (4) for the purpose of this subsection arbi- trage operations are transactions involving the purchase and sale of assets for the purpose of profiting from a current difference between the price of the asset purchased and the price of the asset sold, and in which the asset pur- chased, if not identical to the asset sold, is such that by virtue thereof the taxpayer is, or will be, entitled to acquire assets identical to the assets sold. Such operations must be clear- ly identified by the taxpayer in his records as arbitrage operations on the day of the trans- action or as soon thereafter as may be prac- ticable. Assets acquired for arbitrage oper- ations will include stocks and securities and the right to acquire stocks and securities. Page 2334 TITLE 26—INTERNAL REVENUE CODE § 1233 (g) Hedging transactions This section shall not apply in the case of a hedging transaction in commodity futures. (h) Short sales of property which becomes sub- stantially worthless (1) In general If— (A) the taxpayer enters into a short sale of property, and (B) such property becomes substantially worthless, the taxpayer shall recognize gain in the same manner as if the short sale were closed when the property becomes substantially worthless. To the extent provided in regulations pre- scribed by the Secretary, the preceding sen- tence also shall apply with respect to any op- tion with respect to property, any offsetting notional principal contract with respect to property, any futures or forward contract to deliver any property, and any other similar transaction. (2) Statute of limitations If property becomes substantially worthless during a taxable year and any short sale of such property remains open at the time such property becomes substantially worthless, then— (A) the statutory period for the assessment of any deficiency attributable to any part of the gain on such transaction shall not expire before the earlier of— (i) the date which is 3 years after the date the Secretary is notified by the tax- payer (in such manner as the Secretary may by regulations prescribe) of the sub- stantial worthlessness of such property, or (ii) the date which is 6 years after the date the return for such taxable year is filed, and (B) such deficiency may be assessed before the date applicable under subparagraph (A) notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment. (Aug. 16, 1954, ch. 736, 68A Stat. 327; Aug. 12, 1955, ch. 871, § 1, 69 Stat. 717; Pub. L. 85–866, title I, § 52(a), (b), Sept. 2, 1958, 72 Stat. 1643, 1644; Pub. L. 94–455, title XIV, § 1402(b)(1)(T), (2), title XIX, § 1901(a)(137), Oct. 4, 1976, 90 Stat. 1732, 1787; Pub. L. 97–34, title V, § 501(c), Aug. 13, 1981, 95 Stat. 326; Pub. L. 98–369, div. A, title X, § 1001(b)(17), (e), July 18, 1984, 98 Stat. 1012; Pub. L. 105–34, title X, § 1003(b)(1), Aug. 5, 1997, 111 Stat. 910; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(f)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649; Pub. L. 107–147, title IV, § 412(d)(3)(A), Mar. 9, 2002, 116 Stat. 54.) Editorial Notes AMENDMENTS 2002—Subsec. (e)(2)(E). Pub. L. 107–147 added subpar. (E). 2000—Subsec. (e)(2)(D). Pub. L. 106–554 added subpar. (D). 1997—Subsec. (h). Pub. L. 105–34 added subsec. (h). 1984—Subsecs. (b), (d), (e)(4)(A)(i). Pub. L. 98–369 sub- stituted ‘‘6 months’’ for ‘‘1 year’’ wherever appearing, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amend- ment note below. 1981—Subsec. (e)(2)(A). Pub. L. 97–34 inserted ‘‘, but does not include any position to which section 1092(b) applies’’ after ‘‘taxpayer’’. 1976—Subsec. (b). Pub. L. 94–455, § 1402(b)(2), provided that ‘‘9 months’’ would be changed to ‘‘1 year’’. Pub. L. 94–455, § 1402(b)(1)(T), (2), provided that ‘‘6 months’’ would be changed to ‘‘9 months’’ for taxable years beginning in 1977. Subsec. (c). Pub. L. 94–455, § 1901(a)(137), substituted ‘‘August 16, 1954’’ for ‘‘the date of enactment of this title’’. Subsecs. (d), (e)(4)(A)(i). Pub. L. 94–455, § 1402(b)(2), provided that ‘‘9 months’’ would be changed to ‘‘1 year’’. Pub. L. 94–455, § 1402(b)(1)(T), provided that ‘‘6 months’’ would be changed to ‘‘9 months’’ for taxable years beginning in 1977. 1958—Subsec. (a). Pub. L. 85–866, § 52(b), struck out ‘‘, other than a hedging transaction in commodity fu- tures,’’ after ‘‘sale of property’’. Subsec. (e)(4). Pub. L. 85–866, § 52(a), added par. (4). Subsec. (g). Pub. L. 85–866, § 52(b), added subsec. (g). 1955—Subsec. (f). Act Aug. 12, 1955, added subsec. (f). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2002 AMENDMENT Amendment by Pub. L. 107–147 effective as if included in the provisions of the Community Renewal Tax Relief Act of 2000 [H.R. 5662, as enacted by Pub. L. 106–554], to which such amendment relates, see section 412(e) of Pub. L. 107–147, set out as a note under section 151 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title X, § 1003(b)(2), Aug. 5, 1997, 111 Stat. 910, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall apply to property which becomes substantially worthless after the date of the enactment of this Act [Aug. 5, 1997].’’ EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title. EFFECTIVE DATE OF 1981 AMENDMENT Amendment by Pub. L. 97–34 applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on June 23, 1981, see section 508 of Pub. L. 97–34, set out as an Effective Date note under section 1092 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years begin- ning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years begin- ning after Dec. 31, 1977. Amendment by section 1901(a)(137) of Pub. L. 94–455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment by section 52(b) of Pub. L. 85–866 applica- ble to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) of Pub. L. 85–866, set out as a note under section 165 of this title. Page 2335 TITLE 26—INTERNAL REVENUE CODE § 1234 Pub. L. 85–866, title I, § 52(c), Sept. 2, 1958, 72 Stat. 1644, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply with re- spect to short sales made after December 31, 1957.’’ EFFECTIVE DATE OF 1955 AMENDMENT Act Aug. 12, 1955, ch. 871, § 2, 69 Stat. 718, provided that: ‘‘The amendment made by the first section of this Act [amending this section] shall apply only with re- spect to taxable years ending after the date of the en- actment of this Act [Aug. 12, 1955] and only in the case of a short sale of property made by the taxpayer after such date.’’ § 1234. Options to buy or sell (a) Treatment of gain or loss in the case of the purchaser (1) General rule Gain or loss attributable to the sale or ex- change of, or loss attributable to failure to ex- ercise, an option to buy or sell property shall be considered gain or loss from the sale or ex- change of property which has the same char- acter as the property to which the option re- lates has in the hands of the taxpayer (or would have in the hands of the taxpayer if ac- quired by him). (2) Special rule for loss attributable to failure to exercise option For purposes of paragraph (1), if loss is at- tributable to failure to exercise an option, the option shall be deemed to have been sold or ex- changed on the day it expired. (3) Nonapplication of subsection This subsection shall not apply to— (A) an option which constitutes property described in paragraph (1) of section 1221(a); (B) in the case of gain attributable to the sale or exchange of an option, any income derived in connection with such option which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset; and (C) a loss attributable to failure to exer- cise an option described in section 1233(c). (b) Treatment of grantor of option in the case of stock, securities, or commodities (1) General rule In the case of the grantor of the option, gain or loss from any closing transaction with re- spect to, and gain on lapse of, an option in property shall be treated as a gain or loss from the sale or exchange of a capital asset held not more than 1 year. (2) Definitions For purposes of this subsection— (A) Closing transaction The term ‘‘closing transaction’’ means any termination of the taxpayer’s obligation under an option in property other than through the exercise or lapse of the option. (B) Property The term ‘‘property’’ means stocks and se- curities (including stocks and securities dealt with on a ‘‘when issued’’ basis), com- modities, and commodity futures. (3) Nonapplication of subsection This subsection shall not apply to any op- tion granted in the ordinary course of the tax- payer’s trade or business of granting options. (c) Treatment of options on section 1256 con- tracts and cash settlement options (1) Section 1256 contracts Gain or loss shall be recognized on the exer- cise of an option on a section 1256 contract (within the meaning of section 1256(b)). (2) Treatment of cash settlement options (A) In general For purposes of subsections (a) and (b), a cash settlement option shall be treated as an option to buy or sell property. (B) Cash settlement option For purposes of subparagraph (A), the term ‘‘cash settlement option’’ means any option which on exercise settles in (or could be set- tled in) cash or property other than the un- derlying property. (Aug. 16, 1954, ch. 376, 68A Stat. 329; Pub. L. 85–866, title I, § 53, Sept. 2, 1958, 72 Stat. 1644; Pub. L. 89–809, title II, § 210(a), Nov. 13, 1966, 80 Stat. 1580; Pub. L. 94–455, title XIV, § 1402(b)(1)(U), (2), title XXI, § 2136(a), Oct. 4, 1976, 90 Stat. 1732, 1929; Pub. L. 98–369, div. A, title I, § 105(a), title X, § 1001(b)(18), (e), July 18, 1984, 98 Stat. 629, 1012; Pub. L. 106–170, title V, § 532(c)(1)(H), Dec. 17, 1999, 113 Stat. 1930.) Editorial Notes AMENDMENTS 1999—Subsec. (a)(3)(A). Pub. L. 106–170 substituted ‘‘section 1221(a)’’ for ‘‘section 1221’’. 1984—Subsec. (b)(1). Pub. L. 98–369, § 1001(b)(18), (e), substituted ‘‘6 months’’ for ‘‘1 year’’, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below. Subsec. (c). Pub. L. 98–369, § 105(a), added subsec. (c). 1976—Subsec. (a). Pub. L. 94–455, § 2136(a), inserted in heading ‘‘in the case of the purchaser’’; designated ex- isting provisions as par. ‘‘(1) General rule’’ and sub- stituted ‘‘an option’’ and ‘‘the option’’ for ‘‘a privilege or option’’ and ‘‘the option or privilege’’; redesignated existing subsec. (b) as par. (2) and substituted ‘‘an op- tion’’ and ‘‘the option’’ for ‘‘a privilege or option’’ and ‘‘the privilege or option’’; and redesignated existing subsec. (d)(1) to (3) as par. (3)(A) to (C) and substituted in heading and introductory text ‘‘Nonapplication’’ and ‘‘subsection’’ for ‘‘Non-application’’ and ‘‘section’’, in par. (3)(A) ‘‘an option’’ for ‘‘a privilege or option’’, in par. (3)(B) ‘‘an option’’, ‘‘such option’’ and ‘‘subsection’’ for ‘‘a privilege or option’’, ‘‘such privilege or option’’ and ‘‘section’’ and in par. (3)(C) substituted a period for ‘‘; or’’. Subsec. (b). Pub. L. 94–455, § 2136(a), added subsec. (b), incorporating provisions of a prior subsec. (c) providing for a special rule for grantors of straddles, par. (1) re- lating to ‘‘gain on lapse’’ and reading ‘‘In the case of gain on lapse of an option granted by the taxpayer as part of a straddle, the gain shall be deemed to be gain from the sale or exchange of a capital asset held for not more than 6 months on the day that the option ex- pired.’’; par. (2) relating to ‘‘exception’’ and reading ‘‘This subsection shall not apply to any person who holds securities for sale to customers in the ordinary course of his trade or business.’’, now covered in subsec. (b)(3); and par. (3) relating to definitions of ‘‘straddle’’ and ‘‘security’’. Subsec. (b)(1). Pub. L. 94–455, § 1402(b)(2), provided that ‘‘9 months’’ would be changed to ‘‘1 year’’.