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
      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
      For purposes of this section, the term ''section 1256 contract''
    means -
        (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
        If -
          (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
        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
      (1) Election
        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
      transaction.
      (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
        blood.
      (4) Limitation on losses from hedging transactions
        (A) In general
          (i) Limitation
            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
          hedging transactions.
          (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
      loss.
      (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
        account.
      (4) Special rule for dealer equity options and dealer securities
          futures contracts of limited partners or limited
          entrepreneurs
        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.
    (g) Definitions
      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
          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
          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
        such purposes.
      (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
        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).
      (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.
        (B) Dealer
          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
        this section.
        (C) Securities futures contract
          The term ''securities futures contract'' has the meaning
        given to such term by section 1234B.