Debt Instrument Exception to Constructive Sales

§ 1259. Constructive sales treatment for appreciated financial positions(a) In generalIf there is a constructive sale of an appreciated financial position—(1) the taxpayer shall recognize gain as if such position were sold, assigned, or otherwise terminated at its fair market value on the date of such constructive sale (and any gain shall be taken into account for the taxable year which includes such date), and (2) for purposes of applying this title for periods after the constructive sale—(A) proper adjustment shall be made in the amount of any gain or loss subsequently realized with respect to such position for any gain taken into account by reason of paragraph (1), and (B) the holding period of such position shall be determined as if such position were originally acquired on the date of such constructive sale. (b) Appreciated financial positionFor purposes of this section—(1) In generalExcept as provided in paragraph (2), the term “appreciated financial position” means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were such position sold, assigned, or otherwise terminated at its fair market value. (2) ExceptionsThe term “appreciated financial position” shall not include—(A) any position with respect to debt if—(i) the position unconditionally entitles the holder to receive a specified principal amount, (ii) the interest payments (or other similar amounts) with respect to such position meet the requirements of clause (i) of section 860G(a)(1)(B), and (iii) such position is not convertible (directly or indirectly) into stock of the issuer or any related person, (B) any hedge with respect to a position described in subparagraph (A), and (C) any position which is marked to market under any provision of this title or the regulations thereunder. (3) PositionThe term “position” means an interest, including a futures or forward contract, short sale, or option. (c) Constructive saleFor purposes of this section—(1) In generalA taxpayer shall be treated as having made a constructive sale of an appreciated financial position if the taxpayer (or a related person)—(A) enters into a short sale of the same or substantially identical property, (B) enters into an offsetting notional principal contract with respect to the same or substantially identical property, (C) enters into a futures or forward contract to deliver the same or substantially identical property, (D) in the case of an appreciated financial position that is a short sale or a contract described in subparagraph (B) or (C) with respect to any property, acquires the same or substantially identical property, or (E) to the extent prescribed by the Secretary in regulations, enters into 1 or more other transactions (or acquires 1 or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.