Skip to content

General education, not advice for your situation.

Carry Forward Learning Start here Intern0 XP

Internal Revenue Code · 26 U.S.C.

§ 1260. Gains from constructive ownership transactions

In force Text current through Public Law 119-121 (October 9, 2026) release point 119-121

Official text, no changes From the Office of the Law Revision Counsel, release point 119-121 (current through Public Law 119-121 (October 9, 2026)). Compare it with the official text at uscode.house.gov (external site).

Cite as 26 U.S.C. § 1260

At a glance

Read from the text, the source credit and the official notes. Not part of the law.

Status
In force
Added
December 17, 1999 by Pub. L. 106–170
Last amended
December 29, 2007 by Pub. L. 110–172
Amendments
2 dated changes in the source credit
Length
7 subsections · 1,178 words · about 5 min to read
Defines
4 terms
Cross-references
cites 5; cited by 0 Code sections and 0 other regulations
(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

If any gain is treated as ordinary income for any taxable year by reason of subsection (a)(1), the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined under paragraph (2) with respect to each prior taxable year during any portion of which the constructive ownership transaction was open. Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year.

(2) Amount of interest

The amount of interest determined under this paragraph with respect to a prior taxable year is the amount of interest which would have been imposed under section 6601 on the underpayment of tax for such year which would have resulted if the gain (which is treated as ordinary income by reason of subsection (a)(1)) had been included in gross income in the taxable years in which it accrued (determined by treating the income as accruing at a constant rate equal to the applicable Federal rate as in effect on the day the transaction closed). The period during which such interest shall accrue shall end on the due date (without extensions) for the return of tax imposed by this chapter for the taxable year in which such transaction closed.

(3) Applicable Federal rate

For purposes of paragraph (2), the applicable Federal rate is the applicable Federal rate determined under section 1274(d) (compounded semiannually) which would apply to a debt instrument with a term equal to the period the transaction was open.

(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

This section shall not apply to any constructive ownership transaction if all of the positions which are part of such transaction are marked to market under any provision of this title or the regulations thereunder.

(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

The term “forward contract” means any contract to acquire in the future (or provide or receive credit for the future value of) any financial asset.

(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

Except as provided in regulations prescribed by the Secretary, if a constructive ownership transaction is closed by reason of taking delivery, this section shall be applied as if the taxpayer had sold all the contracts, options, or other positions which are part of such transaction for fair market value on the closing date. The amount of gain recognized under the preceding sentence shall not exceed the amount of gain treated as ordinary income under subsection (a). Proper adjustments shall be made in the amount of any gain or loss subsequently realized for gain recognized and treated as ordinary income under this subsection.

(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.)

Terms defined here

Where the text says “the term … means”. Select a term to jump to its definition.

Cross-references

Computed from the citations in the text of Title 26 and 26 CFR.

This section cites 5 other sections

Amendment history

From the source credit and the official notes, newest first.

  1. Amended by Pub. L. 110–172Parts changed in 2007: (c)(2)(G)
  2. Amended by Pub. L. 108–357Parts changed in 2004: (c)(2)(H)
  3. Added by Pub. L. 106–170

Where it sits in the Code

  1. Subtitle A Income Taxes
  2. Chapter 1 NORMAL TAXES AND SURTAXES
  3. Subchapter P Capital Gains and Losses
  4. Part IV SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES

Nearby sections

Official notes

Show the Law Revision Counsel's notes (amendments, effective dates)

Editorial Notes

Amendments

2007—Subsec. (c)(2)(G). Pub. L. 110–172 substituted “subsection (d)” for “subsection (e)” and inserted “and” at end.

2004—Subsec. (c)(2)(H) to (J). Pub. L. 108–357 redesignated subpar. (J) as (H) and struck out former subpars. (H) and (I), which included foreign personal holding company and foreign investment company (as defined in section 1246(b)) within definition of “pass-thru entity”.

Statutory Notes and Related Subsidiaries

Effective Date of 2004 Amendment

Amendment by Pub. L. 108–357 applicable to taxable years of foreign corporations beginning after Dec. 31, 2004, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end, see section 413(d)(1) of Pub. L. 108–357, set out as an Effective and Termination Dates of 2004 Amendments note under section 1 of this title.

Effective Date

Pub. L. 106–170, title V, § 534(c), Dec. 17, 1999, 113 Stat. 1934, provided that: “The amendments made by this section [enacting this section] shall apply to transactions entered into after July 11, 1999.”