Constructive Sale Rule - Section 1259

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".

BREAKING DOWN '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. Section 988

    A financial transaction involving a capital loss or gain on an ...
  2. Section 1244 Stock

    A type of equity named after the portion of the Internal Revenue ...
  3. Offset

    1. To liquidate a futures position by entering an equivalent, ...
  4. Capital Gains Treatment

    The specific taxes assessed on investment capital gains as determined ...
  5. Capital Gains Tax

    A type of tax levied on capital gains incurred by individuals ...
  6. Tax Loss Carryforward

    A tax loss carryforward takes place where a business or individual ...
Related Articles
  1. Trading

    How The Straddle Rule Creates Tax Opportunities For Options Traders

    This rule allows traders to substantially reduce their risk, and possibly benefit on their tax returns as well.
  2. Personal Finance

    What You Need To Know About Capital Gains And Taxes

    Find out how your profits are taxed and what to consider when making investment decisions.
  3. Markets

    What Is Section 1231 Property?

    Section 1231 property is depreciable business property that’s held for a year or longer.
  4. Managing Wealth

    Understanding Capital Gains

    Capital gain refers to the increase in value of a capital asset or an investment security upon sale. In other words, if you buy company stock, real estate or fine art and then sell it for more ...
  5. Managing Wealth

    Understanding the Capital Gains Tax

    A capital gains tax is imposed on the profits realized when an investor or corporation sells an asset for a higher price than its purchase price.
  6. Managing Wealth

    How to Avoid Violating Wash Sale Rules When Realizing Tax Losses

    How to avoid violating the IRS wash sale rules when realizing capital losses in your taxable investment account.
  7. Personal Finance

    7 Year-End Tax Planning Strategies

    Do you have a capital loss that could be booked and used to offset future tax liabilities? If so, it may be time to sell.
  8. Managing Wealth

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  9. Financial Advisor

    Here's the Best Way to Skirt Capital Gains Taxes

    Taxpayers who know the rules for netting gains/losses can generate additional losses to net against the taxable gains in their portfolios. Here's how.
  10. Personal Finance

    Internet Sales Tax Vs. Brick & Mortar Sales Tax

    Learn about the differences between sales taxes and Internet sales taxes, and the goods and services that typically incur each type of tax.
RELATED FAQS
  1. Will I pay capital gains tax on the profits from the sale of my home?

    I am single and have lived in my house for 30 years. Does it make a difference if I rent or buy after selling the house? ... Read Answer >>
  2. What is the difference between income tax and capital gains tax?

  3. How are capital gains calculated when using an online brokerage account?

    Are capital gains calculated annually or on every trade? How can selling a stock at a loss save me money on taxes? Also, ... Read Answer >>
  4. Do I have to pay capital gains?

    I am a 72 year old retired widow. I want to sell my home and purchase a condo at the same value.  ... Read Answer >>
  5. Can I use my capital loss to offset taxes?

    I have a capital loss from the sale of my parent's home. Is it was wise to convert my 401k funds to regular savings, ... Read Answer >>
  6. Are capital gains taxed differently in different countries?

    Learn about capital gains taxes in the Unites States as well as those of other countries, where these tax rates vary significantly. Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center