A “conversion transaction” is a transaction generally involving two or more positions taken with regard to the same or similar property. The investor is in the economic position of a lender who expects to receive income while undertaking no significant risks other than those of a lender. Where substantially all of your expected return is in the nature of interest on a loan from the following types of transactions, some or all of the income earned on the transaction is treated as ordinary income rather than capital gain:
In a conversion transaction, the amount of ordinary income is limited to an “applicable imputed income amount.” This is generally the amount of interest that would have accrued on the net investment in the conversion transaction for the period ending on the date of disposition. To figure the interest element, 120% of the applicable federal rate, compounded semiannually, is used. The applicable rate is the federal short-term, mid-term, or long-term rate, depending on the term of the transaction. If the term is indefinite, the federal short-term rate is used. The federal rates are determined monthly and published in the Internal Revenue Bulletin.
3.145.98.239