Constructive Sale Rule - Section 1259

AAA

DEFINITION of 'Constructive Sale Rule - Section 1259'

A section of the Internal Revenue Code that expands the types of transactions that are considered to be sales and are subject to capital gains tax. According to this rule, transactions that effectively take an offsetting position to an already owned position are considered to be constructive sales. The purpose of the constructive sale rule is to prevent investors from locking in investment gains without paying capital gains and to limit their ability to transfer gains from one tax period to another.

This rule is Section 1259 of the Code. It is also referred to as "Constructive Sales Treatment for Appreciated Financial Positions".

INVESTOPEDIA EXPLAINS 'Constructive Sale Rule - Section 1259'

This rule was introduced by Congress in 1997. Transactions considered to be constructive sales include making short sales against similar or identical positions (known as "short sales against the box"), and entering into futures or forward contracts that call for the delivery of an already-held asset.

There are some exceptions to the rule that remove the need to pay capital gains. For example, if the transaction is closed prior to 30 days after the end of the year in which the gain was achieved, or if the original position is held for 60 days after the offsetting position is closed, then no capital gains tax will be incurred.

RELATED TERMS
  1. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  2. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  3. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  4. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  5. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  6. Realized Gain

    A gain resulting from selling an asset at a price higher than ...
Related Articles
  1. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  2. Capital Gains Tax 101
    Taxes

    Capital Gains Tax 101

  3. Are Social Security survivor benefits ...
    Retirement

    Are Social Security survivor benefits ...

  4. Are fringe benefits direct or indirect ...
    Taxes

    Are fringe benefits direct or indirect ...

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center