§ 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),
(b)
Section
1256 contract defined
(2)
Exceptions
The term “section
1256 contract” shall not include—
(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.
(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))—
(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
(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.
(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.
(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) 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))—
(5)
Special rule related to losses
Section
1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).
(g)
Definitions
For purposes of this section—
(1)
Regulated futures contracts defined
The term “regulated futures contract” means a contract—
(2)
Foreign currency contract defined
(A)
Foreign currency contract
The term “foreign currency contract” means a contract—
(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—
(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—
(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 exchange
The term “qualified board or exchange” means—
(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—
(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.