Sec. 3401. Treatment of certain derivatives
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Subchapter E of chapter 1 is amended by adding at the end the following new part: Sec. 485. Treatment of certain derivatives. Sec. 486. Derivative defined. For purposes of this subtitle— any derivative held by a taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year), and proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1).
All items of income, gain, loss, and deduction with respect to any derivative— shall be treated as ordinary income or loss, and shall be treated for purposes of section 172(d)(4) as attributable to a trade or business of the taxpayer. In the case of any straddle which includes any derivative, subsections
(a)and
(b)shall apply to all positions comprising such straddle in the same manner as such subsections apply to such derivative. In the case of any built-in gain position to which subsection
(a)applies by reason of paragraph (1)— in addition to any other time at which such position is treated as sold under subsection (a)(1), such position shall be treated as sold for its fair market value at the time that the straddle is established with respect to such position, proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain taken into account by reason of clause (i), and subsection
(b)shall not apply to any gain taken into account by reason of clause (i). For purposes of this subsection, the term built-in gain position means any position (other than a derivative to which subsection
(a)applies) with respect to which a gain would be realized if such position were sold for its fair market value at the time that the straddle is established with respect to such position. Subparagraph
(A)shall not apply to any position with respect to debt if— the interest payments (or other similar amounts) with respect to such position meet the requirements of section 860G(a)(1)(B)(i), and such position is not convertible (directly or indirectly) into stock of the issuer or any related person. Subparagraph
(A)shall not apply to any position which is part of a straddle if— all the offsetting positions which are part of such straddle consist of 1 or more qualified covered call options (as defined in paragraph (6)) and the stock to be purchased from the taxpayer under such options, and such straddle is not part of a larger straddle. In the case of any built-in loss position to which subsection
(a)applies by reason of paragraph (1), any gain or loss realized under subsection (a)(1) shall be properly adjusted so as not to take into account the loss referred to in subparagraph
(B)with respect to such position. For purposes of subparagraph (A), the term built-in loss position means any position (other than a derivative to which subsection
(a)applies) with respect to which a loss would be realized if such position were sold for its fair market value at the time that the straddle is established with respect to such position. For purposes of section 1222, in the case of any position to which subsection
(a)applies by reason of paragraph (1), the holding period of such position shall not include— the period during which subsection
(a)applies to such position, and in the case of a built-in gain position, the period before such position is treated as sold under paragraph (2)(A). For purposes of this section— the term straddle has the meaning given such term by section 1092(c) applied by treating all offsetting positions as being with respect to personal property, and the term position includes any derivative. For purposes of paragraph (2)(D), the term qualified covered call option means any option granted by the taxpayer to purchase stock held by the taxpayer (or stock acquired by the taxpayer in connection with the granting of the option) but only if— such option is traded on a national securities exchange which is registered with the Securities and Exchange Commission or other market which the Secretary determines has rules adequate to carry out the purposes of this paragraph, such option is granted— more than 30 days before the day on which the option expires, and not more than 90 days before the day on which the option expires, such option is not granted by an options dealer (as defined in subparagraph (B)) in connection with such dealer’s activity of dealing in options, and gain or loss with respect to such option would not be ordinary income or loss if determined without regard to this section. For purposes of subparagraph (A), the term options dealer means— any person registered with an appropriate national securities exchange as a market maker or specialist in listed options, and to the extent provided by the Secretary consistent with the purposes of this paragraph, any person whom the Secretary determines performs functions similar to the persons described in clause (i). The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph and paragraph (2)(D). Such regulations may include modifications to the provisions of this paragraph and paragraph (2)(D) which are appropriate to take account of changes in the practices of option exchanges or to prevent the use of options for tax avoidance purposes. The rules of subsections
(a)and
(b)shall also apply to the termination (or transfer) during the taxable year of the taxpayer’s obligation (or rights) with respect to a derivative by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, by expiration, by settlement, or otherwise. If paragraph
(1)applies with respect to any position which is part of a straddle, the rules of subsections
(a)and
(b)shall apply to every position which is part of such straddle. For purposes of this section— For purposes of subsection (d), fair market value shall be determined at the time of the termination (or transfer). To the extent provided in regulations prescribed by the Secretary, fair market value shall be determined without regard to any premium or discount based on the proportion of the total available trading units which are held. The rules of sections 263(g) and 263A shall not apply to any derivative or other position to which subsection
(a)applies, and section 1091 shall not apply (and section 1092 shall apply) to any loss recognized under subsection (a). For purposes of this part, except as otherwise provided in this section, the term derivative means any contract (including any option, forward contract, futures contract, short position, swap, or similar contract) the value of which, or any payment or other transfer with respect to which, is (directly or indirectly) determined by reference to one or more of the following: Any share of stock in a corporation. Any partnership or beneficial ownership interest in a partnership or trust. Any evidence of indebtedness. Except as provided in subsection (d), any real property. Any commodity which is actively traded (within the meaning of section 1092(d)(1)). Any currency. Any rate, price, amount, index, formula, or algorithm. Any other item as the Secretary may prescribe. Such term shall not include any item described in paragraphs
(1)through (8). For purposes of subsection (a)(4), the term real property shall not include— a tract of real property (as defined in section 1237(c)), or any real property which would be property described in section 1221(a)(1) with respect to the taxpayer if held directly by the taxpayer. The Secretary shall prescribe regulations or other guidance under which multiple tracts of real property may be treated as a single tract of real property for purposes of subparagraph (A)(i) if the contract referred to in subsection
(a)is of a type which is designed to facilitate the acquisition or disposition of such real property. For purposes of this part, the term derivative shall not include any contract which is part of a hedging transaction (as defined in section 1221(b)). For exception for section 988 hedging transactions, see section 988(d)(1). To the extent provided by the Secretary, for purposes of this part, the term derivative shall not include the right to the return of the same or substantially identical securities transferred in a securities lending transaction, sale-repurchase transaction, or similar financing transaction. For purposes of this part, the term derivative shall not include any option described in section 83(e)(3) received in connection with the performance of services. For purposes of this part, the term derivative shall not include any insurance, annuity, or endowment contract issued by an insurance company to which subchapter L applies (or issued by any foreign corporation to which such subchapter would apply if such foreign corporation were a domestic corporation). For purposes of this part, the term derivative shall not include, and subsections
(c)and (d)(2) of section 485 shall not apply to, any derivative (determined without regard to this subsection) with respect to stock issued by any member of the same worldwide affiliated group (as defined in section 864(f)) in which the taxpayer is a member. For purposes of this part, the term derivative shall not include any contract with respect to any commodity if— such contract requires physical delivery with the option of cash settlement only in unusual and exceptional circumstances, and such commodity is used (and is used in quantities with respect to which such derivative relates) in the normal course of the taxpayer’s trade or business (or, in the case of an individual, for personal consumption). If a contract has derivative and nonderivative components, then each derivative component shall be treated as a derivative for purposes of this part. If the derivative component cannot be separately valued, then the entire contract shall be treated as a derivative for purposes of this part. A debt instrument shall not be treated as having a derivative component merely because— such debt instrument is denominated in a nonfunctional currency (as defined in section 988(c)(1)(C)(ii)), payments with respect to such debt instrument are determined by reference to the value of a nonfunctional currency (as so defined), or such debt instrument is a convertible debt instrument, contingent payment debt instrument, a variable rate debt instrument, an integrated debt instrument, an investment unit, a debt instrument with alternative payment schedules, or other debt instrument with respect to which the regulations under section 1275(d) apply. Except as otherwise provided by the Secretary, for purposes of this part, American depository receipts (and similar instruments) with respect to shares of stock in foreign corporations shall be treated as shares of stock in such foreign corporations. . Section 475(c)(2) is amended— by adding and at the end of subparagraph (C), by striking subparagraphs
(D)and
(E)and by redesignating subparagraph
(F)as subparagraph (D), by striking subparagraph (A), (B), (C), (D), or
(E)in subparagraph (D)(i), as so redesignated, and inserting subparagraph (A), (B), or
(C), and by amending the last sentence to read as follows: Such term shall not include any position to which section 485(a) applies. Section 475(e)(2) is amended— by adding and at the end of subparagraph (A), by striking subparagraphs
(B)and
(C)and by redesignating subparagraph
(D)as subparagraph (B), and by striking subparagraph (A),
(B)or
(C)in subparagraph (B)(i), as so redesignated, and inserting subparagraph
(A). Section 475(b) is amended by striking paragraph (4). Section 475(d)(2)(B) is amended— by striking subsection (c)(2)(F)(iii) and inserting subsection (c)(2)(D)(iii) , and by striking subsection (c)(2)(F) and inserting subsection (c)(2)(D) . Section 475(f)(1)(D) is amended by striking subsections (b)(4) and
(d)and inserting subsection
(d). Section 1092(e) is amended to read as follows: This section shall not apply in the case of— any hedging transaction (as defined in section 1221(b)), and any straddle (as defined in section 485) which includes any derivative (as defined in section 486). . Section 263(g)(3) is amended to read as follows: This subsection shall not apply in the case of— any hedging transaction (as defined in section 1221(b)), and any straddle (as defined in section 485) which includes any derivative (as defined in section 486). . Section 1092(b) is amended— by striking paragraph (2), and by striking all that precedes The Secretary shall and inserting the following: The Secretary shall . Section 1092(c) is amended by striking paragraph (4). Section 1092 is amended by striking subsection
(f)and by redesignating subsection
(g)as subsection (f). The Secretary of the Treasury, or the Secretary’s designee, shall modify the regulations issued under section 1275(d) of the Internal Revenue Code of 1986 to provide that convertible debt instruments are treated in a manner similar to contingent payment debt instruments. Part IV of subchapter P of chapter 1 is amended by striking sections 1233, 1234, 1234A, 1234B, 1236, 1256, 1258, 1259, and 1260 (and by striking the items relating to such sections in the table of sections for such part). Section 1092(b) is amended by inserting (as in effect before their repeal) after section 1233 . Section 6045(h)(2) is amended— by striking (as defined in section 1234(b)(2)(A) , and by adding at the end the following: For purposes of the preceding sentence, the term . closing transaction means any termination of the taxpayer’s obligation under an option in property other than through the exercise or lapse of the option. Section 475(d)(3)(A) is amended by striking or section 1236(b) . Section 512(b)(5) is amended by striking section 1236(c) and inserting section 1058(c) . Section 1058 is amended— by striking (as defined in section 1236(c)) in subsection (a), and by redesignating subsection
(c)as subsection
(d)and by inserting after subsection
(b)the following new subsection: For purposes of this section, the term security means any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing. . Section 461(i)(2)(B), as amended by the preceding provisions of this Act, is amended to read as follows: any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 461(j)(4)), and . Section 475(d)(1) is amended by striking sections 263(g), 263A, and 1256(a) and inserting sections 263(g) and 263A . Section 988(c)(1) is amended by striking subparagraphs
(D)and (E). Section 1092(a)(3)(C)(ii)(II) is amended by striking section 1256(e) and inserting section 1221(b) . Section 1092(d) is amended by striking paragraphs
(5)and
(6)and by redesignating paragraphs
(7)and
(8)as paragraphs
(5)and (6), respectively. Section 1212 is amended by striking subsection (c). Section 1223 is amended by striking paragraphs
(7)and (14). Section 1281(b)(1)(E) is amended to read as follows: is a hedging transaction (as defined in section 1221(b)), or . Section 1402 is amended by striking subsection (i). Section 4982(e)(6)(B) is amended by striking sections 1256 and 1296 and inserting sections 485 and 1296 . Section 475(f)(1) is amended by striking subparagraph
(C)and by redesignating subparagraph
(D)as subparagraph (C). Section 355(g)(2)(B)(i)(V) is amended to read as follows: any derivative (as defined in section 486), . Section 856(n)(4) is amended by inserting or derivatives (as defined in section 486) after securities (as defined in section 475(c)(2)) . Section 857(e)(2)(B)(i), as amended by the preceding provisions of this Act, is amended by striking section 860E or 1272 and inserting section 485, 860E, or 1272 . Section 988(d)(1) is amended— by striking or 1256 and inserting or 485 , and by striking 1092, and 1256 and inserting 485, and 1092 . Section 1091(e) is amended to read as follows: Notwithstanding any other provision of this section, a derivative (as defined in section 486) shall not be treated as a security for purposes of this section. . Section 1221(a)(6) is amended to read as follows: any derivative (as defined in section 486), . Section 1221(b) is amended by striking paragraph (1). Section 4975(f)(11)(D) is amended by striking clauses
(i)and
(ii)and inserting the following: The term security means any security described in section 475(c)(2) (without regard to subparagraph (D)(iii) thereof) and any derivative with respect to such a security (within the meaning of section 486). The term commodity means any commodity described in section 475(e)(2) (without regard to subparagraph (B)(iii) thereof) and any derivative with respect to such a commodity (within the meaning of section 486). . The table of parts for subchapter E of chapter 1 is amended by adding at the end the following new item: Part IV. Derivatives . The amendments made by this section shall apply to— taxable years ending after December 31, 2014, in the case of property acquired and positions established after December 31, 2014, and taxable years ending after December 31, 2019, in the case of any other property or position. For purposes of this subsection, any property acquired on or before December 31, 2014, which becomes part of a straddle (as defined in section 485, as added by this section) after such date shall be treated as a position established after such date.