|Section 1256. Section 1256 contracts
marked to market
(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
(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
For purposes of this section, the term ''section 1256 contract''
(1) any regulated futures contract,
(2) any foreign currency contract,
(3) any nonequity option,
(4) any dealer equity option, and
(5) any dealer securities futures contract.
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.
(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
(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
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
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
(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
(4) Limitation on losses from hedging transactions
(A) In general
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
(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)(C) 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
(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
(4) Special rule for dealer equity options and dealer securities
futures contracts of limited partners or limited
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.
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
(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.
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
(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
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).
(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.
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
(C) Securities futures contract
The term ''securities futures contract'' has the meaning
given to such term by section 1234B.