---
kind: "section"
citation: "26 U.S.C. § 1260"
title: "26"
title_heading: "Internal Revenue Code"
number: "1260"
heading: "Gains from constructive ownership transactions"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/1260"
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"
---

# §1260. Gains from constructive ownership transactions

- (a) **In general—** If the [taxpayer](/usc/26/1313.md?p=b) has gain from a constructive ownership transaction with respect to any financial asset and such gain would (without regard to this section) be treated as a long-term capital gain—
  - (1) such gain shall be treated as ordinary income to the extent that such gain exceeds the net underlying long-term capital gain, and
  - (2) to the extent such gain is treated as a long-term capital gain after the application of [paragraph (1)](#a-1), the [determination](/usc/26/1313.md?p=a) of the capital gain rate (or rates) applicable to such gain under [section 1(h)](/usc/26/1.md?p=h) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net underlying long-term capital gain.
- (b) **Interest charge on deferral of gain recognition—**
  - (1) **In general—** If any gain is treated as ordinary income for any taxable year by reason of [subsection (a)(1)](#a-1), the tax imposed by this chapter for such taxable year shall be increased by the amount of [interest](/usc/26/856.md?p=f-1) determined under [paragraph (2)](#b-2) with respect to each prior taxable year during any portion of which the constructive ownership transaction was open. Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the [taxpayer](/usc/26/1313.md?p=b) for [interest](/usc/26/856.md?p=f-1) paid or accrued during such taxable year.
  - (2) **Amount of interest—** The amount of [interest](/usc/26/856.md?p=f-1) determined under this paragraph with respect to a prior taxable year is the amount of [interest](/usc/26/856.md?p=f-1) which would have been imposed under [section 6601](/usc/26/6601.md) on the underpayment of tax for such year which would have resulted if the gain (which is treated as ordinary income by reason of [subsection (a)(1)](#a-1)) had been included in gross income in the taxable years in which it accrued (determined by treating the income as accruing at a constant rate equal to the applicable Federal rate as in effect on the day the transaction closed). The period during which such [interest](/usc/26/856.md?p=f-1) shall accrue shall end on the [due date](/usc/26/430.md?p=k-6-B) (without extensions) for the return of tax imposed by this chapter for the taxable year in which such transaction closed.
  - (3) **Applicable Federal rate—** For purposes of [paragraph (2)](#b-2), the applicable Federal rate is the applicable Federal rate determined under [section 1274(d)](/usc/26/1274.md?p=d) (compounded semiannually) which would apply to a [debt instrument](/usc/26/1275.md?p=a-1-A) with a term equal to the period the transaction was open.
  - (4) **No credits against increase in tax—** Any increase in tax under [paragraph (1)](#b-1) shall not be treated as tax imposed by this chapter for purposes of determining—
    - (A) the amount of any credit allowable under this chapter, or
    - (B) the amount of the tax imposed by section 55.
- (c) **Financial asset—** For purposes of this section—
  - (1) **In general—** The term “financial asset” means—
    - (A) any equity [interest](/usc/26/856.md?p=f-1) in any pass-thru entity, and
    - (B) to the extent provided in regulations—
      - (i) any [debt instrument](/usc/26/1275.md?p=a-1-A), and
      - (ii) any [stock](/usc/26/1504.md?p=a-4) in a corporation which is not a pass-thru entity.
  - (2) **Pass-thru entity—** For purposes of [paragraph (1)](#c-1), the term “pass-thru entity” means—
    - (A) a [regulated investment company](/usc/26/851.md?p=a),
    - (B) a [real estate investment trust](/usc/26/856.md?p=a),
    - (C) an [S corporation](/usc/26/1361.md?p=a-1),
    - (D) a [partnership](/usc/26/761.md?p=a),
    - (E) a trust,
    - (F) a common trust [fund](/usc/26/851.md?p=g-2),
    - (G) a passive foreign [investment company](/usc/26/368.md?p=a-2-F-iii) (as defined in [section 1297](/usc/26/1297.md) without regard to [subsection (d)](#d) thereof), and
    - (H) a [REMIC](/usc/26/860D.md?p=a).
- (d) **Constructive ownership transaction—** For purposes of this section—
  - (1) **In general—** The [taxpayer](/usc/26/1313.md?p=b) shall be treated as having entered into a constructive ownership transaction with respect to any financial asset if the [taxpayer](/usc/26/1313.md?p=b)—
    - (A) holds a long position under a notional principal [contract](/usc/26/101.md?p=f-3-A) with respect to the financial asset,
    - (B) enters into a forward or futures [contract](/usc/26/101.md?p=f-3-A) to acquire the financial asset,
    - (C) is the holder of a call option, and is the grantor of a put option, with respect to the financial asset and such options have substantially equal strike prices and substantially contemporaneous maturity dates, or
    - (D) to the extent provided in regulations prescribed by the Secretary, enters into one or more other transactions (or acquires one or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.
  - (2) **Exception for positions which are marked to market—** This section shall not apply to any constructive ownership transaction if all of the positions which are part of such transaction are marked to market under any provision of this title or the regulations thereunder.
  - (3) **Long position under notional principal contract—** A person shall be treated as holding a long position under a notional principal [contract](/usc/26/101.md?p=f-3-A) with respect to any financial asset if such person—
    - (A) has the right to be paid (or receive credit for) all or substantially all of the investment yield (including appreciation) on such financial asset for a specified period, and
    - (B) is obligated to reimburse (or provide credit for) all or substantially all of any decline in the [value](/usc/26/851.md?p=c-4) of such financial asset.
  - (4) **Forward contract—** The term “forward [contract](/usc/26/101.md?p=f-3-A)” means any [contract](/usc/26/101.md?p=f-3-A) to acquire in the future (or provide or receive credit for the future [value](/usc/26/851.md?p=c-4) of) any financial asset.
- (e) **Net underlying long-term capital gain—** For purposes of this section, in the case of any constructive ownership transaction with respect to any financial asset, the term “net underlying long-term capital gain” means the aggregate net capital gain that the [taxpayer](/usc/26/1313.md?p=b) would have had if—
  - (1) the financial asset had been acquired for fair market [value](/usc/26/851.md?p=c-4) on the date such transaction was opened and sold for fair market [value](/usc/26/851.md?p=c-4) on the date such transaction was closed, and
  - (2) only gains and losses that would have resulted from the deemed ownership under [paragraph (1)](#e-1) were taken into account.

  The amount of the net underlying long-term capital gain with respect to any financial asset shall be treated as zero unless the amount thereof is established by clear and convincing evidence.

- (f) **Special rule where taxpayer takes delivery—** Except as provided in regulations prescribed by the Secretary, if a constructive ownership transaction is closed by reason of taking delivery, this section shall be applied as if the [taxpayer](/usc/26/1313.md?p=b) had sold all the [contracts](/usc/26/101.md?p=f-3-A), options, or other positions which are part of such transaction for fair market [value](/usc/26/851.md?p=c-4) on the closing date. The amount of gain recognized under the preceding sentence shall not exceed the amount of gain treated as ordinary income under [subsection (a)](#a). Proper adjustments shall be made in the amount of any gain or loss subsequently realized for gain recognized and treated as ordinary income under this subsection.
- (g) **Regulations—** The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations—
  - (1) to permit [taxpayers](/usc/26/1313.md?p=b) to mark to market constructive ownership transactions in lieu of applying this section, and
  - (2) to exclude certain forward [contracts](/usc/26/101.md?p=f-3-A) which do not convey substantially all of the economic return with respect to a financial asset.

## Source credit

(Added Pub. L. 106–170, title V, § 534(a), Dec. 17, 1999, 113 Stat. 1931; amended Pub. L. 108–357, title IV, § 413(c)(23), Oct. 22, 2004, 118 Stat. 1509; Pub. L. 110–172, § 11(a)(23), (24)(B), Dec. 29, 2007, 121 Stat. 2486.)

## Notes

### Editorial Notes

### Amendments

2007—Subsec. (c)(2)(G). Pub. L. 110–172 substituted “subsection (d)” for “subsection (e)” and inserted “and” at end.

2004—Subsec. (c)(2)(H) to (J). Pub. L. 108–357 redesignated subpar. (J) as (H) and struck out former subpars. (H) and (I), which included foreign personal holding company and foreign investment company (as defined in section 1246(b)) within definition of “pass-thru entity”.

### Statutory Notes and Related Subsidiaries

### Effective Date of 2004 Amendment

Amendment by Pub. L. 108–357 applicable to taxable years of foreign corporations beginning after Dec. 31, 2004, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end, see section 413(d)(1) of Pub. L. 108–357, set out as an Effective and Termination Dates of 2004 Amendments note under section 1 of this title.

### Effective Date

Pub. L. 106–170, title V, § 534(c), Dec. 17, 1999, 113 Stat. 1934, provided that: “The amendments made by this section [enacting this section] shall apply to transactions entered into after July 11, 1999.”