26 USC 1256 - Section 1256 contracts marked to market

View all text of Part IV [§ 1231 - § 1260]

§ 1256. Section 1256 contracts marked to market

(a) General ruleFor 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 generalFor purposes of this section, the term “section 1256 contract” means—

(A) any regulated futures contract,

(B) any foreign currency contract,

(D) any dealer equity option, and

(E) any dealer securities futures contract.

(2) ExceptionsThe 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.

(1) In general

(2) Special rule where taxpayer takes delivery on or exercises part of straddleIf—

(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

(d) Elections with respect to mixed straddles

(1) Election

(2) Time and manner

(3) Election revocable only with consent

(4) Mixed straddleFor 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

(2) Definition of hedging transaction

(3) Special rule for syndicates

(A) In general

(B) Syndicate defined

(C) Holdings attributable to active managementFor 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 461(k)(4))—

(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

(ii) Carryover of disallowed loss

(B) Exception where economic loss

(D) Hedging lossThe 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

(f) Special rules

(1) Denial of capital gains treatment for property identified as part of a hedging transaction

(2) Subsection (a)(3) not to apply to ordinary income property

(3) Capital gain treatment for traders in section 1256 contracts

(A) In general

(B) Exception for certain hedging transactions

(4) Special rule for dealer equity options and dealer securities futures contracts of limited partners or limited entrepreneursIn 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

(g) DefinitionsFor purposes of this section—

(1) Regulated futures contracts definedThe 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 contractThe 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

(3) Nonequity option

(4) Dealer equity optionThe 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

(5) Listed option

(6) Equity optionThe 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 exchangeThe 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

(B) Persons trading in other markets

(9) Dealer securities futures contract

(A) In generalThe 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

(Added Pub. L. 97–34, title V, § 503(a), Aug. 13, 1981, 95 Stat. 327; amended Pub. L. 97–354, § 5(a)(38), Oct. 19, 1982, 96 Stat. 1696; Pub. L. 97–448, title I, § 105(c)(1)–(3), (5)(A)–(C), Jan. 12, 1983, 96 Stat. 2385, 2386; Pub. L. 98–369, div. A, title I, §§ 102(a), (b), (e)(1), (5), 104(a), 107(c), (d), title VII, § 722(a)(2), July 18, 1984, 98 Stat. 620, 621, 623, 624, 628, 630, 972; Pub. L. 99–514, title XII, § 1261(c), Oct. 22, 1986, 100 Stat. 2591; Pub. L. 106–170, title V, § 532(b)(4), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(1)–(3)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649, 2763A–650; Pub. L. 107–147, title IV, § 416(b)(1), Mar. 9, 2002, 116 Stat. 55; Pub. L. 108–311, title IV, § 405(a)(2), Oct. 4, 2004, 118 Stat. 1188; Pub. L. 109–135, title IV, § 412(oo), Dec. 21, 2005, 119 Stat. 2639; Pub. L. 111–203, title XVI, § 1601(a), July 21, 2010, 124 Stat. 2223; Pub. L. 115–141, div. U, title IV, § 401(a)(176)(A), Mar. 23, 2018, 132 Stat. 1192.)