§ 1258. Recharacterization of gain from certain financial transactions
(a)
General rule
In the case of any gain—
(1)
which (but for this section) would be treated as gain from the sale or exchange of a capital asset, and
(2)
which is recognized on the disposition or other termination of any position which was held as part of a conversion transaction,
such gain (to the extent such gain does not exceed the applicable imputed income amount) shall be treated as ordinary income.
(b)
Applicable imputed income amount
For purposes of subsection (a), the term “applicable imputed income amount” means, with respect to any disposition or other termination referred to in subsection (a), an amount equal to—
(1)
the amount of interest which would have accrued on the taxpayer’s net investment in the conversion transaction for the period ending on the date of such disposition or other termination (or, if earlier, the date on which the requirements of subsection (c) ceased to be satisfied) at a rate equal to 120 percent of the applicable rate, reduced by
(c)
Conversion transaction
For purposes of this section, the term “conversion transaction” means any transaction—
(1)
substantially all of the taxpayer’s expected return from which is attributable to the time value of the taxpayer’s net investment in such transaction, and
(2)
which is—
(A)
the holding of any property (whether or not actively traded), and the entering into a contract to sell such property (or substantially identical property) at a price determined in accordance with such contract, but only if such property was acquired and such contract was entered into on a substantially contemporaneous basis,
(d)
Definitions and special rules
For purposes of this section—
(2)
Applicable rate
The term “applicable rate” means—
(3)
Treatment of built-in losses
(A)
In general
If any position with a built-in loss becomes part of a conversion transaction—
(4)
Position taken into account at fair market value
In determining the taxpayer’s net investment in any conversion transaction, there shall be included the fair market value of any position which becomes part of such transaction (determined as of the time such position became part of such transaction).
(5)
Special rule for options dealers and commodities traders
(A)
In general
Subsection (a) shall not apply to transactions—
(i)
of an options dealer in the normal course of the dealer’s trade or business of dealing in options, or
(ii)
of a commodities trader in the normal course of the trader’s trade or business of trading section
1256 contracts.
(B)
Definitions
For purposes of this paragraph—
(C)
Limited partners and limited entrepreneurs
In the case of any gain from a transaction recognized by an entity which is allocable to a limited partner or limited entrepreneur (within the meaning of section
464
(e)(2)), subparagraph (A) shall not apply if—
(i)
substantially all of the limited partner’s (or limited entrepreneur’s) expected return from the entity is attributable to the time value of the partner’s (or entrepreneur’s) net investment in such entity,