Constructive Sale Rule - Section 1259

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".

Notes:

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.

See also: Capital Gain, Capital Loss, Forward Contract, Futures Contract, Internal Revenue Service - IRS, Realized Gain, Section 1031, Short Sell Against the Box