---
kind: "section"
citation: "26 U.S.C. § 1258"
title: "26"
title_heading: "Internal Revenue Code"
number: "1258"
heading: "Recharacterization of gain from certain financial transactions"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/1258"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter P — Capital Gains and Losses"
  - "Part IV — Special Rules for Determining Capital Gains and Losses"
---

# §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](/usc/26/864.md?p=c-8-D) of a [capital asset](/usc/26/1221.md?p=a), and
  - (2) which is recognized on the [disposition](/usc/26/424.md?p=c-1) 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)](#a), the term “applicable imputed income amount” means, with respect to any [disposition](/usc/26/424.md?p=c-1) or other termination referred to in [subsection (a)](#a), an amount equal to—
  - (1) the amount of [interest](/usc/26/856.md?p=f-1) which would have accrued on the [taxpayer](/usc/26/1313.md?p=b)’s net investment in the conversion transaction for the period ending on the date of such [disposition](/usc/26/424.md?p=c-1) or other termination (or, if earlier, the date on which the requirements of [subsection (c)](#c) ceased to be satisfied) at a rate equal to 120 percent of the applicable rate, reduced by
  - (2) the amount treated as ordinary income under [subsection (a)](#a) with respect to any prior [disposition](/usc/26/424.md?p=c-1) or other termination of a position which was held as a part of such transaction.

  The Secretary shall by regulations provide for such reductions in the applicable imputed income amount as may be appropriate by reason of amounts capitalized under [section 263(g)](/usc/26/263.md?p=g), ordinary income received, or otherwise.

- (c) **Conversion transaction—** For purposes of this section, the term “conversion transaction” means any transaction—
  - (1) substantially all of the [taxpayer](/usc/26/1313.md?p=b)’s expected return from which is attributable to the time [value](/usc/26/851.md?p=c-4) of the [taxpayer](/usc/26/1313.md?p=b)’s net investment in such transaction, and
  - (2) which is—
    - (A) the holding of any [property](/usc/26/317.md?p=a) (whether or not actively traded), and the entering into a [contract](/usc/26/101.md?p=f-3-A) to sell such [property](/usc/26/317.md?p=a) (or substantially identical [property](/usc/26/317.md?p=a)) at a price determined in accordance with such [contract](/usc/26/101.md?p=f-3-A), but only if such [property](/usc/26/317.md?p=a) was acquired and such [contract](/usc/26/101.md?p=f-3-A) was entered into on a substantially contemporaneous basis,
    - (B) an applicable straddle,
    - (C) any other transaction which is marketed or sold as producing capital gains from a transaction described in [paragraph (1)](#c-1), or
    - (D) any other transaction specified in regulations prescribed by the Secretary.
- (d) **Definitions and special rules—** For purposes of this section—
  - (1) **Applicable straddle—** The term “applicable straddle” means any straddle (within the meaning of [section 1092(c)](/usc/26/1092.md?p=c)).
  - (2) **Applicable rate—** The term “applicable rate” means—
    - (A) the applicable Federal rate determined under [section 1274(d)](/usc/26/1274.md?p=d) (compounded semiannually) as if the conversion transaction were a [debt instrument](/usc/26/1275.md?p=a-1-A), or
    - (B) if the term of the conversion transaction is indefinite, the Federal short-term rates in effect under [section 6621(b)](/usc/26/6621.md?p=b) during the period of the conversion transaction (compounded daily).
  - (3) **Treatment of built-in losses—**
    - (A) **In general—** If any position with a built-in loss becomes part of a conversion transaction—
      - (i) for purposes of applying this subtitle to such position for periods after such position becomes part of such transaction, such position shall be taken into account at its fair market [value](/usc/26/851.md?p=c-4) as of the time it became part of such transaction, except that
      - (ii) upon the [disposition](/usc/26/424.md?p=c-1) or other termination of such position in a transaction in which gain or loss is recognized, such built-in loss shall be recognized and shall have a character determined without regard to this section.
    - (B) **Built-in loss—** For purposes of [subparagraph (A)](#d-3-A), the term “built-in loss” means the loss (if any) which would have been realized if the position had been disposed of or otherwise terminated at its fair market [value](/usc/26/851.md?p=c-4) as of the time such position became part of the conversion transaction.
  - (4) **Position taken into account at fair market value—** In determining the [taxpayer](/usc/26/1313.md?p=b)’s net investment in any conversion transaction, there shall be included the fair market [value](/usc/26/851.md?p=c-4) 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)](#a) shall not apply to transactions—
      - (i) of an [options dealer](/usc/26/1402.md?p=i-2-A) in the normal course of the dealer’s [trade or business](/usc/26/1402.md?p=c) of dealing in options, or
      - (ii) of a commodities trader in the normal course of the trader’s [trade or business](/usc/26/1402.md?p=c) of trading [section 1256](/usc/26/1256.md) contracts.
    - (B) **Definitions—** For purposes of this paragraph—
      - (i) **Options dealer—** The term “[options dealer](/usc/26/1402.md?p=i-2-A)” has the meaning given such term by [section 1256(g)(8)](/usc/26/1256.md?p=g-8).
      - (ii) **Commodities trader—** The term “commodities trader” means any person who is a member (or, except as otherwise provided in regulations, is entitled to trade as a member) of a domestic board of trade which is designated as a [contract](/usc/26/101.md?p=f-3-A) market by the Commodity Futures Trading Commission.
    - (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](/usc/26/761.md?p=b) or limited entrepreneur (within the meaning of [section 461(k)(4)](/usc/26/461.md?p=k-4)), [subparagraph (A)](#d-5-A) shall not apply if—
      - (i) substantially all of the limited [partner](/usc/26/761.md?p=b)’s (or limited entrepreneur’s) expected return from the entity is attributable to the time [value](/usc/26/851.md?p=c-4) of the [partner](/usc/26/761.md?p=b)’s (or entrepreneur’s) net investment in such entity,
      - (ii) the transaction (or the [interest](/usc/26/856.md?p=f-1) in the entity) was marketed or sold as producing capital gains treatment from a transaction described in [subsection (c)(1)](#c-1), or
      - (iii) the transaction (or the [interest](/usc/26/856.md?p=f-1) in the entity) is a transaction (or [interest](/usc/26/856.md?p=f-1)) specified in regulations prescribed by the Secretary.

## Source credit

(Added Pub. L. 103–66, title XIII, § 13206(a)(1), Aug. 10, 1993, 107 Stat. 462; amended Pub. L. 108–357, title VIII, § 888(c)(2), Oct. 22, 2004, 118 Stat. 1643; Pub. L. 115–141, div. U, title IV, § 401(a)(176)(B), Mar. 23, 2018, 132 Stat. 1192.)

## Notes

### Editorial Notes

### Amendments

2018—Subsec. (d)(5)(C). Pub. L. 115–141 substituted “section 461(k)(4)” for “section 464(e)(2)” in introductory provisions.

2004—Subsec. (d)(1). Pub. L. 108–357 struck out “; except that the term ‘personal property’ shall include stock” before period at end.

### Statutory Notes and Related Subsidiaries

### Effective Date of 2004 Amendment

Amendment by Pub. L. 108–357 applicable to positions established on or after Oct. 22, 2004, see section 888(e) of Pub. L. 108–357, set out as a note under section 246 of this title.

### Effective Date

Pub. L. 103–66, title XIII, § 13206(a)(3), Aug. 10, 1993, 107 Stat. 465, as amended by Pub. L. 104–188, title I, § 1703(n)(11), Aug. 20, 1996, 110 Stat. 1877, provided that: “The amendments made by this subsection [enacting this section] shall apply to conversion transactions entered into after April 30, 1993.”