30.8 Constructive Sales of Appreciated Financial Positions

One aspect of a constructive sale of an appreciated financial position was discussed in 30.5, dealing with short sales. The constructive sale rules apply not only to short sales of stock but also to other transactions such as an appreciated financial position in a partnership interest or certain debt obligations.

You have made a constructive sale of an appreciated financial position if you:

You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into any of the above transactions.

A contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security is not a constructive sale if it settles within one year of the date you enter into it.

Tax treatment.

If you are considered to have transacted a constructive sale, you must report as taxable income gain on the financial position as if the position was sold at its fair market value on the date of the constructive sale. The property held by you receives a new holding period starting on the date of the constructive sale and its basis is the fair market value at that date. Thus, under the constructive sale rule you are also treated as immediately repurchasing the position as of the date of the constructive sale.

Caution

Constructive Sales of Appreciated Position

If you are subject to the constructive sale rules, you will have to report income as if you had made a sale although you still hold the position.

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Closing a short sale to avoid a constructive sale.

You may avoid the constructive sale rule if:

If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the end of the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, tests (2) and (3) apply.

An appreciated financial position.

You have an appreciated financial position interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain.

An appreciated financial position does not include any position that is marked to market, including Section 1256 contracts. It also does not include any position in a debt instrument if:

For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the debt exception above.

A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position.